1. Application of Time Value of Money Skills Aa Aa Flynn Fireballer has been playing baseball since he was five years old and has always dreamed of playing in the big leagues. Last season, he was a starting pitcher for a double-A (AA)-level baseball team, the Ketchum Baldies; last year, he was the first runner-up for the Minor League Player of the Year award. Using his 99 mph fastball, an impeccable curve ball and slider, and a reliable changeup pitch, he achieved a 18-2 win-loss record, an earned run average (ERA) of 2.23, and 166 strikeouts in 147.2 innings pitched. He is also your best friend. Two weeks ago, on his three-year anniversary with the team, Flynn received the following email from his agent, George Get-d'Bucks, indicating that he is being called up to the Wichita Wizards, the Baldies's corresponding Major League Baseball (MLB) team. Moreover, Flynn's contract is being revised to reflect his new status. The email describes the general terms and conditions of Flynn's revised contract. From George Get-d'Bucks Flynn Fireballer New Team, New Contract Proposal To: Subject: Flynn Congratulations! You've been called up to the Wichita Wizards. Below are the offered terms and conditions of your new contract. After you review them and think about the offer, call me and we'll discuss your options. Congrats again! Salary and Incentives: Flynn Fireballer, hereafter referred to as the "Player," is offered a four-year contract with an annual salary of $564,000 per year, Flynn is so excited! According to George, the contract is worth $3,634,400-assuming receipt of all possible bonuses. After rereading the email twice and calling his family, Flynn called you to review the terms of the contract and verify George's calculations. After an extended conversation about what he'll do with his newfound wealth, you and Flynn have agreed that any funds received could be invested to earn 9.0000%, compounded monthly. Contract Evaluation Worksheet Complete the following worksheet by inserting the appropriate values to evaluate the contract and answer the related questions. Note: To clarify possible sources of confusion and simplify your calculations: Assume that all bonuses are earned in each of the years for which they are available and are paid at the end of the corresponding year(s), unless specifically stated differently. Their value should be based on the salary 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 calculation Round all dollar amounts to the nearest whole dollar and carry out all interest rate factors to four decimal places. Assumptions and Calulated Values Bank Rate Information: Flynn's Bank Account Rate (compounded monthly) 9.0000% Monthly Bank Rate Effective Interest Rate Year 1 Salary and Bonus Information: Annual Salary (4% COLA adjustment) Year 2 Year 3 Year 4 Total value 586,560 48,880 10.4542 $564,000 Monthly Salary Discount factor (based on Cell B4 above) 11.4349 9.5577 8.7380 Discounted Monthly Salary 467,180 $1,959,817 Time-in-League Bonus $10,000 Discount factor (based on Cell B4 above) Discounted Time-in-League Bonus 0.9562 Milestone Bonus $250,000 0.7642 $1,000,000 Discount factor (based on Cell B5 above) 0.9142 0.8358 0.6986 Discounted Milestone Bonus $208,950 Performance Bonus $91,503 $352,071 Discount factor (based on Cell B5 above) 0.9142 0.8358 0.7642 0.6986 Discounted Performance Bonus $73,537 $800 10.4542 $8,363 Monthly Endorsement Contract Payment Discount factor (based on Cell B4 above) Discounted Monthly Endorsement Payment 11.4349 Contract's Total Nominal Value 1. Given your worksheet calculations, which of the following statements is accurate? George's estimate of the value of Flynn's contract accurate on either a nominal or discounted basis? George's estimate of the value of Flynn's contract is incorrect on a nominal basis, and the error is $46,937 George's estimate of the nominal value of Flynn's contract is correct. It is appropriate and necessary to discount the endorsement contract using the bank account's effective interest rate because of differences in the timing of the compounding of the bank account and that of the payments on the endorsement contract. 2. The local car dealer creating Flynn's endorsement contract can earn 6% (compounded quarterly) on her deposited funds. She would have to deposit each quarter, starting exactly two years before the day Flynn signs his contract, to fund her endorsement contract. [Note: The future value interest factor of 6% compounded quarterly for eight quarterly periods is 8.4328.] 1. Application of Time Value of Money Skills Aa Aa Flynn Fireballer has been playing baseball since he was five years old and has always dreamed of playing in the big leagues. Last season, he was a starting pitcher for a double-A (AA)-level baseball team, the Ketchum Baldies; last year, he was the first runner-up for the Minor League Player of the Year award. Using his 99 mph fastball, an impeccable curve ball and slider, and a reliable changeup pitch, he achieved a 18-2 win-loss record, an earned run average (ERA) of 2.23, and 166 strikeouts in 147.2 innings pitched. He is also your best friend. Two weeks ago, on his three-year anniversary with the team, Flynn received the following email from his agent, George Get-d'Bucks, indicating that he is being called up to the Wichita Wizards, the Baldies's corresponding Major League Baseball (MLB) team. Moreover, Flynn's contract is being revised to reflect his new status. The email describes the general terms and conditions of Flynn's revised contract. From George Get-d'Bucks Flynn Fireballer New Team, New Contract Proposal To: Subject: Flynn Congratulations! You've been called up to the Wichita Wizards. Below are the offered terms and conditions of your new contract. After you review them and think about the offer, call me and we'll discuss your options. Congrats again! Salary and Incentives: Flynn Fireballer, hereafter referred to as the "Player," is offered a four-year contract with an annual salary of $564,000 per year, Flynn is so excited! According to George, the contract is worth $3,634,400-assuming receipt of all possible bonuses. After rereading the email twice and calling his family, Flynn called you to review the terms of the contract and verify George's calculations. After an extended conversation about what he'll do with his newfound wealth, you and Flynn have agreed that any funds received could be invested to earn 9.0000%, compounded monthly. Contract Evaluation Worksheet Complete the following worksheet by inserting the appropriate values to evaluate the contract and answer the related questions. Note: To clarify possible sources of confusion and simplify your calculations: Assume that all bonuses are earned in each of the years for which they are available and are paid at the end of the corresponding year(s), unless specifically stated differently. Their value should be based on the salary 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 calculation Round all dollar amounts to the nearest whole dollar and carry out all interest rate factors to four decimal places. Assumptions and Calulated Values Bank Rate Information: Flynn's Bank Account Rate (compounded monthly) 9.0000% Monthly Bank Rate Effective Interest Rate Year 1 Salary and Bonus Information: Annual Salary (4% COLA adjustment) Year 2 Year 3 Year 4 Total value 586,560 48,880 10.4542 $564,000 Monthly Salary Discount factor (based on Cell B4 above) 11.4349 9.5577 8.7380 Discounted Monthly Salary 467,180 $1,959,817 Time-in-League Bonus $10,000 Discount factor (based on Cell B4 above) Discounted Time-in-League Bonus 0.9562 Milestone Bonus $250,000 0.7642 $1,000,000 Discount factor (based on Cell B5 above) 0.9142 0.8358 0.6986 Discounted Milestone Bonus $208,950 Performance Bonus $91,503 $352,071 Discount factor (based on Cell B5 above) 0.9142 0.8358 0.7642 0.6986 Discounted Performance Bonus $73,537 $800 10.4542 $8,363 Monthly Endorsement Contract Payment Discount factor (based on Cell B4 above) Discounted Monthly Endorsement Payment 11.4349 Contract's Total Nominal Value 1. Given your worksheet calculations, which of the following statements is accurate? George's estimate of the value of Flynn's contract accurate on either a nominal or discounted basis? George's estimate of the value of Flynn's contract is incorrect on a nominal basis, and the error is $46,937 George's estimate of the nominal value of Flynn's contract is correct. It is appropriate and necessary to discount the endorsement contract using the bank account's effective interest rate because of differences in the timing of the compounding of the bank account and that of the payments on the endorsement contract. 2. The local car dealer creating Flynn's endorsement contract can earn 6% (compounded quarterly) on her deposited funds. She would have to deposit each quarter, starting exactly two years before the day Flynn signs his contract, to fund her endorsement contract. [Note: The future value interest factor of 6% compounded quarterly for eight quarterly periods is 8.4328.]