Two different teams offer a professional basketball player contracts for playing this year. Both contracts are guaranteed, and payments will be made even if the athlete is injured and cannot play. Team A’s contract would pay him $1 million today. Team B’s contract would pay him $500,000 today and $2 million ten years from now. Assuming that there is no inflation, that our pro is concerned only about which contract has the highest present value, and that his personal discount rate (interest rate) is 5%, which contract does he accept? Does the answer change if the discount rate is 20%?
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