1. Application of Time Value of Money skilis Nick Nohitter has been playing baseball since he was flve years old and has always dreamed of playing in the big leagues. Last aeason, he was a starting pitcher for a double-A (AA)-level baseball team, the Yakima Hops, Iast year, he was the first runner-up for the Minor League Mayer of the Year award. Using his 97 mph fastball, an impeccabie curve ball and slider, and a reiable changeup pitch, he achieved a 173 wih-loss record, an sarned run average (ERA) of 2.34 , and 108 strikeouts in 123.1 innings pitched. He is aiso your beut friend. Two weeks ago, on his three-year anniversary with the team, Nick recelved the following email from his agent, Michael Make-arteam, indicating that, he is being calied up to the El Paso Grandies, the Hops's corresponding Major League Baseball (MLB) team, Moreover, Nick's contract ia being revised to reflect his new status. The emall describes the general terms and conditions of Nok's revised contract. Fromi Michael Make+d'Team Tot Nick Nohitter Subject: New Team, New Contract Proposal Nick Congratulationst You've been called up to the EI Paso Grandies, Below are the offered terms and conditions of your new contract. After you review them and think about the offer, call me and we-l discuss your options. Congrats againt Salary and Incentives: - Nick Nohitter hereafter referted to as the "plaver," is offered a four-year contract with an annual salary of 5474,000 per year, to be paid at the end of each month in the contract term. - Nick Nohitter hereafter referred to as the "Player," is offeref a four-year contract with an annual salary of $474,000 per year, to be paid at the end of each month in the contract term. - Under the league's collective bargaining agreement, the Player will recelve a 4% cost-of-living adjustment (COLA) to his annual salary at the beginning of every other year. This means that the Player's annual salary will increase at the beginning of year 2 and year 4 , as applicable. - In addition, the Player will recelve a one-time $15,000 time-in-league bonus after six months of participation with an ML.B team. This bonus will be paid immediately on completion of the six-month period. - The Player is offered a performance-based bonus, as well as a milestone bonus. Both are intended to encourage outstanding performance. - The Player is offered the following award-based performance incentive: a 15% bonus payabie at the end of the operating year if he is selected to play in the All-Star game. The Player is also offered the following milestone bonus: a $100,000 bonus if he ties Nolan Ryan's 1973 single-season strikeout record ( 383 strikeouts). - The Player is eligible for each potential bonus each year that the contract is in effect and, if expressed as a percentage, will be based on the value of the Player's base annual salary for the corresponding year. If earned, the performance and milestone bonuses will be distributed in a single payment at the beginning of the next contract year. Although this proposal describes only one milestone, the actual contract contains several progressive milestones. Exceeding one milestone creates the opportunity to exceed another. In addition to the proposal offered by the Grandles, I've also been able to secure the following endorsement opportunity: A local car dealer has offered you a contract that will pay $750 per month for two years. This contract is contingent on your accepting the contract with the Grandies and will take effect immediately upon signing your NLBB contract. In return for these payments, you will participate in the dealer's promotional events, such as signing autographs and allowing photographs as requested. I've also attached a worksheet that you can use to analyze the deal. I'm in negotiations for the rest of the day, so let's discuss your thoughts on the contract proposal tomorrow. I'm proud of you! Take care, Michael Michael Make-dTeam Sports Agent, R\&R Talent Management Inc. | El Paso Nick is so excitedl According to Michael, the contract is worth $2,640,400-assuming receipt of all possible bonuses. After rereading the email twice and caling his family, Nick called you to review the terms of the contract and verify Michael's calculations. After an extended conversation about what he'll do with his newfound wealth, you and Nick have agreed that any funds received could be invested to carn 7.50 y, compounded monthly. Contract Evaluation'Worksheet Complete the following worksheet by inserting the appropriate values to evaluate the contract and answer the related questions. Notet To ciarify possible sources of confusion and simplify your calculations: - Assume that all bonuses are earned in each of the years for which they are avaliable and are paid at the end of the corresponding year(s), unless specifically stated differently. Their value should be based on the falary in effect at the time the bonuses were earned - The endorsement proceeds are paid in accordance with the terms of the deal. - Remember that the timing of a cash flow affects the interest rate that is used to discount the cash flow. For example, annual interest rates should be used to discount annual cash flows, and monthly interest rates are used to discount monthly cash flows. Therefore, it may be necessary to compute the appropriate interest rate that should be used in a discounting caiculation. - Round all dollar amounts to the nearest whole dollar and carry out all interest rate foctors to four decimal places. - When entering intermediate walues as answer choices, be sure to round them to the nearest dolitar, however when using those same values to calculate another answer, do not round. Nick Nohitter's Contract Evaluation Worksheet Value 30 Contract's Total Discounted Value 1. Given your worksheet calculations, which of the following statements is accurate? is Michael's estimate of the value of Nick's contract accurate on either a nominal or discounted basis? Check anl that apply. It is appropriate and necessary to discount the endorsement contract using the bank account's effective annual interest rate because of differences in the timing of the compounding of the bank account and that of the payments on the endorsement contract. It is appropriate and necessary to discount the performance bonus using the bank account's effective annual interest rate because of differences in the timing of the compounding of the bank account and that of the payments for the performance bonus. 1. Given your worksheet calculations, which of the following statements is accurate? is Michael's estimate of the value of Nick contract accurate on either a nominal or discounted basis? check an that apply. It is appropriate and necessary to discount the endorsement contract using the bank accountis effective annual interest rate because of differences in the biming of the compounding of the bank account and that of the payments on the endorsement contract. It is appropriate and necessary to discount the performance bonus using the bank account's effective annual interest rate because of differences in the timing of the compounding of the bank account and that of the payments for the pertormance bonus Michael's estimate of the value of Nick's contract is incorrect on a nomninal basis, and the error is 543,035. Related Question: The local car dealer creating Nick's endorsenent opportunity can earn 6 W (compounded quarterly) on his depostad fubdt. She would have to deposit each quarter, starting exactly two years before the day Nick wigns his contract, to fund her endorsement. contract. [Note: The future value interest factor of 6% compounded quarteriy for elght quarterly periods is 1.432 . 1. Application of Time Value of Money skilis Nick Nohitter has been playing baseball since he was flve years old and has always dreamed of playing in the big leagues. Last aeason, he was a starting pitcher for a double-A (AA)-level baseball team, the Yakima Hops, Iast year, he was the first runner-up for the Minor League Mayer of the Year award. Using his 97 mph fastball, an impeccabie curve ball and slider, and a reiable changeup pitch, he achieved a 173 wih-loss record, an sarned run average (ERA) of 2.34 , and 108 strikeouts in 123.1 innings pitched. He is aiso your beut friend. Two weeks ago, on his three-year anniversary with the team, Nick recelved the following email from his agent, Michael Make-arteam, indicating that, he is being calied up to the El Paso Grandies, the Hops's corresponding Major League Baseball (MLB) team, Moreover, Nick's contract ia being revised to reflect his new status. The emall describes the general terms and conditions of Nok's revised contract. Fromi Michael Make+d'Team Tot Nick Nohitter Subject: New Team, New Contract Proposal Nick Congratulationst You've been called up to the EI Paso Grandies, Below are the offered terms and conditions of your new contract. After you review them and think about the offer, call me and we-l discuss your options. Congrats againt Salary and Incentives: - Nick Nohitter hereafter referted to as the "plaver," is offered a four-year contract with an annual salary of 5474,000 per year, to be paid at the end of each month in the contract term. - Nick Nohitter hereafter referred to as the "Player," is offeref a four-year contract with an annual salary of $474,000 per year, to be paid at the end of each month in the contract term. - Under the league's collective bargaining agreement, the Player will recelve a 4% cost-of-living adjustment (COLA) to his annual salary at the beginning of every other year. This means that the Player's annual salary will increase at the beginning of year 2 and year 4 , as applicable. - In addition, the Player will recelve a one-time $15,000 time-in-league bonus after six months of participation with an ML.B team. This bonus will be paid immediately on completion of the six-month period. - The Player is offered a performance-based bonus, as well as a milestone bonus. Both are intended to encourage outstanding performance. - The Player is offered the following award-based performance incentive: a 15% bonus payabie at the end of the operating year if he is selected to play in the All-Star game. The Player is also offered the following milestone bonus: a $100,000 bonus if he ties Nolan Ryan's 1973 single-season strikeout record ( 383 strikeouts). - The Player is eligible for each potential bonus each year that the contract is in effect and, if expressed as a percentage, will be based on the value of the Player's base annual salary for the corresponding year. If earned, the performance and milestone bonuses will be distributed in a single payment at the beginning of the next contract year. Although this proposal describes only one milestone, the actual contract contains several progressive milestones. Exceeding one milestone creates the opportunity to exceed another. In addition to the proposal offered by the Grandles, I've also been able to secure the following endorsement opportunity: A local car dealer has offered you a contract that will pay $750 per month for two years. This contract is contingent on your accepting the contract with the Grandies and will take effect immediately upon signing your NLBB contract. In return for these payments, you will participate in the dealer's promotional events, such as signing autographs and allowing photographs as requested. I've also attached a worksheet that you can use to analyze the deal. I'm in negotiations for the rest of the day, so let's discuss your thoughts on the contract proposal tomorrow. I'm proud of you! Take care, Michael Michael Make-dTeam Sports Agent, R\&R Talent Management Inc. | El Paso Nick is so excitedl According to Michael, the contract is worth $2,640,400-assuming receipt of all possible bonuses. After rereading the email twice and caling his family, Nick called you to review the terms of the contract and verify Michael's calculations. After an extended conversation about what he'll do with his newfound wealth, you and Nick have agreed that any funds received could be invested to carn 7.50 y, compounded monthly. Contract Evaluation'Worksheet Complete the following worksheet by inserting the appropriate values to evaluate the contract and answer the related questions. Notet To ciarify possible sources of confusion and simplify your calculations: - Assume that all bonuses are earned in each of the years for which they are avaliable and are paid at the end of the corresponding year(s), unless specifically stated differently. Their value should be based on the falary in effect at the time the bonuses were earned - The endorsement proceeds are paid in accordance with the terms of the deal. - Remember that the timing of a cash flow affects the interest rate that is used to discount the cash flow. For example, annual interest rates should be used to discount annual cash flows, and monthly interest rates are used to discount monthly cash flows. Therefore, it may be necessary to compute the appropriate interest rate that should be used in a discounting caiculation. - Round all dollar amounts to the nearest whole dollar and carry out all interest rate foctors to four decimal places. - When entering intermediate walues as answer choices, be sure to round them to the nearest dolitar, however when using those same values to calculate another answer, do not round. Nick Nohitter's Contract Evaluation Worksheet Value 30 Contract's Total Discounted Value 1. Given your worksheet calculations, which of the following statements is accurate? is Michael's estimate of the value of Nick's contract accurate on either a nominal or discounted basis? Check anl that apply. It is appropriate and necessary to discount the endorsement contract using the bank account's effective annual interest rate because of differences in the timing of the compounding of the bank account and that of the payments on the endorsement contract. It is appropriate and necessary to discount the performance bonus using the bank account's effective annual interest rate because of differences in the timing of the compounding of the bank account and that of the payments for the performance bonus. 1. Given your worksheet calculations, which of the following statements is accurate? is Michael's estimate of the value of Nick contract accurate on either a nominal or discounted basis? check an that apply. It is appropriate and necessary to discount the endorsement contract using the bank accountis effective annual interest rate because of differences in the biming of the compounding of the bank account and that of the payments on the endorsement contract. It is appropriate and necessary to discount the performance bonus using the bank account's effective annual interest rate because of differences in the timing of the compounding of the bank account and that of the payments for the pertormance bonus Michael's estimate of the value of Nick's contract is incorrect on a nomninal basis, and the error is 543,035. Related Question: The local car dealer creating Nick's endorsenent opportunity can earn 6 W (compounded quarterly) on his depostad fubdt. She would have to deposit each quarter, starting exactly two years before the day Nick wigns his contract, to fund her endorsement. contract. [Note: The future value interest factor of 6% compounded quarteriy for elght quarterly periods is 1.432