Answer to Question #147223 in Economics of Enterprise for Muhammad Anwer

Question

Khurram Ali is negotiating his employment contract. His opportunity cost is 15%. He has been offered two possible 4-year contracts. Payments are in Pakistani rupees and are guaranteed, and they would be made at the end of each year. Terms of each contract are as follows:

Contract Year 1 Year 2 Year 3 Year 4
Contract 1 4 Million 4 Million 4 Million 4 Million
Contract 2 10 Million 1 Million 1 Million 1 Million

As his financial adviser, which contract would you recommend that he accept?

Answer 1

NPV $=$4/1.15+4/1.15$^2$ +4/1.15$^3$ +4/1.15$^4$ $=$ 11.42

NPV$=$ 10/1.15+1/1.15$^2$ +1/1.15$^3$ +1/1.15$^4$ $=$ 10.68

As a financial advisor I Will tell him to go for the first contract.