1. Application of Time Value of Money Skills Aa Aa Gavin Goldenarm has been playing baseball since he was five years old and has always dreamed of playing in the big leagues. ust season, he WB ntng pitcher for double-A (AA)-level baseball team, the Ketchum Belies; last year, he was the fost rmer-up for the Minor League p ayer of the Year awerd. Using his 96 mph fastball, an impecable arve bal and slider, and a reliable changeup pitch, he achieved a 16-3 win-loss record, an earned average (ERA) of 2.98, and 146 strikeouts in 117.0 innings pitched. He is also your best friend Two wecks aga, on his throe-year anniversary with the team, Gavin received the following emal from his agent, Noah Never-Enough, indicating that he is being called up to the Mobile Bayhoppers, the Baldies's corresponding Major League Baseball (MLB) team. Moreover, Gavin's contract is being revised to refilect his new status. The email describes the general terms and conditions of Gavin's revised contract From: Nosh Never-Enough Gavin Goldenarm Subject: New Team, New Contract Proposal Congratulations! You ve been called up to the Mobile Bayhoppers. Below are the offered terms and conditions of your new contract. After you revien thern and think about the offer, call me and we'll discuss your options. Congrats againl Salary and Incentives: Gavin Goldenarm, hereafter referred to as the "Player, "is offered a four year contract with an annual salary of $594,000 per year Gavin is so excited! According to Noah,he contract is worth $3,792,400-assuming receipt of all possble bonses. After rereading the email twice and calling his family, Gavn caled you to review the terms of the contract and verity ah's calculations. After an extended conversation about what he'll do with his newfound weath, you and Gavin heve agreed that any funds received could be invested to earn 7.5000%, compounded monthly. Contract Evaluation Worksheet Complete the folowing worksheet by inserting the appropriate values to evaluate the contract and answer the related questions. Note: To danty possible sources of confusion and simplity 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 cormesponding 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 tems of the deal Remember that the timing of a sh fw affects the interest rate that is used to dscount the cash flow. For example, annual interest rates should be used to discount annuel 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 shouild be used in a discounting caloulation Round all dollar amounts to the nearest whole dollar and carry out all interest rate factors to four decimal places * Gavin Goldenarm's Contract Evaluation Worksheet Assumptions and Calulated Valuers 2 Bank Rate Information: 3 Gavin's Bank Account Rate (compounded monthly) 7.5000% Monthly Bank Rate 5 Effective Inberest Rate Salary and Bonus Information: 8 | Annual Salary (4% COLA adjustment Year 1 Year 2 Year 3 Year 4 Total value $594,000 617,760 Monthly Salary 0Discount factor (based on Cell B4 above) .9255 510,965 9.2105 Discounted Monthly Salany 2,125,273 13 Time-in-League Bonus 14 Discount factor (based on Cell B4 above) 15,000 0.9633 Discounted Time-in-League Bonus 17 Milestone Bonus 18 Discount factor (based on Cell B5 above) 19 Discounted Milestone Bonus $250,000 0.7991 1,000,000 0.9280 0.8611 0.7415 215,275 21 Performance Bonus 22 Discount factor (based on Cell B5 above) 23 Discounted Performance Bonus 96,371 0.7415 $370,799 0.9280 0.8611 0.7991 $79,790 25 Monthly Endorsement Contract Payment 26 Discount factor (based on Cell B4 above) Discounted Monthly Endorsement Payment $8,022 29 Contract's Total Nominal Value 30 Contract's Totel Discounted Velue 3,280,133 1. Given your worksheet calculations, which of the following statements is accurate? Noah's estimate of the value of Gavin's contract accurate on either a nominal or discounted basis? ah's estimate of the nominal value of Gan's contract is correct. It is appropriate and necessary to discount the performance bonus using the bank account's efective interest rate because of differences in the timing of the compounding of the bank account and that of the peyments for the performence bonus It is appropriate and necessary to discount the endorsement contract using the bank account's emective interest rate because of differences in the timing of the compounding of the bank account and that of the payments on the endorsement contract 2The local car dealer creating Gavin's endorsement contract can earn 6% (compounded quarterty) on her deposited funds. She would have to deposit each quartor, starting exacty two years before the day Gavin signs his contract, to fund her endonsement contract [Note: The future value interest factor of 6% compounded quarterly for eight quarterly periods s a4328] 1. Application of Time Value of Money Skills Aa Aa Gavin Goldenarm has been playing baseball since he was five years old and has always dreamed of playing in the big leagues. ust season, he WB ntng pitcher for double-A (AA)-level baseball team, the Ketchum Belies; last year, he was the fost rmer-up for the Minor League p ayer of the Year awerd. Using his 96 mph fastball, an impecable arve bal and slider, and a reliable changeup pitch, he achieved a 16-3 win-loss record, an earned average (ERA) of 2.98, and 146 strikeouts in 117.0 innings pitched. He is also your best friend Two wecks aga, on his throe-year anniversary with the team, Gavin received the following emal from his agent, Noah Never-Enough, indicating that he is being called up to the Mobile Bayhoppers, the Baldies's corresponding Major League Baseball (MLB) team. Moreover, Gavin's contract is being revised to refilect his new status. The email describes the general terms and conditions of Gavin's revised contract From: Nosh Never-Enough Gavin Goldenarm Subject: New Team, New Contract Proposal Congratulations! You ve been called up to the Mobile Bayhoppers. Below are the offered terms and conditions of your new contract. After you revien thern and think about the offer, call me and we'll discuss your options. Congrats againl Salary and Incentives: Gavin Goldenarm, hereafter referred to as the "Player, "is offered a four year contract with an annual salary of $594,000 per year Gavin is so excited! According to Noah,he contract is worth $3,792,400-assuming receipt of all possble bonses. After rereading the email twice and calling his family, Gavn caled you to review the terms of the contract and verity ah's calculations. After an extended conversation about what he'll do with his newfound weath, you and Gavin heve agreed that any funds received could be invested to earn 7.5000%, compounded monthly. Contract Evaluation Worksheet Complete the folowing worksheet by inserting the appropriate values to evaluate the contract and answer the related questions. Note: To danty possible sources of confusion and simplity 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 cormesponding 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 tems of the deal Remember that the timing of a sh fw affects the interest rate that is used to dscount the cash flow. For example, annual interest rates should be used to discount annuel 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 shouild be used in a discounting caloulation Round all dollar amounts to the nearest whole dollar and carry out all interest rate factors to four decimal places * Gavin Goldenarm's Contract Evaluation Worksheet Assumptions and Calulated Valuers 2 Bank Rate Information: 3 Gavin's Bank Account Rate (compounded monthly) 7.5000% Monthly Bank Rate 5 Effective Inberest Rate Salary and Bonus Information: 8 | Annual Salary (4% COLA adjustment Year 1 Year 2 Year 3 Year 4 Total value $594,000 617,760 Monthly Salary 0Discount factor (based on Cell B4 above) .9255 510,965 9.2105 Discounted Monthly Salany 2,125,273 13 Time-in-League Bonus 14 Discount factor (based on Cell B4 above) 15,000 0.9633 Discounted Time-in-League Bonus 17 Milestone Bonus 18 Discount factor (based on Cell B5 above) 19 Discounted Milestone Bonus $250,000 0.7991 1,000,000 0.9280 0.8611 0.7415 215,275 21 Performance Bonus 22 Discount factor (based on Cell B5 above) 23 Discounted Performance Bonus 96,371 0.7415 $370,799 0.9280 0.8611 0.7991 $79,790 25 Monthly Endorsement Contract Payment 26 Discount factor (based on Cell B4 above) Discounted Monthly Endorsement Payment $8,022 29 Contract's Total Nominal Value 30 Contract's Totel Discounted Velue 3,280,133 1. Given your worksheet calculations, which of the following statements is accurate? Noah's estimate of the value of Gavin's contract accurate on either a nominal or discounted basis? ah's estimate of the nominal value of Gan's contract is correct. It is appropriate and necessary to discount the performance bonus using the bank account's efective interest rate because of differences in the timing of the compounding of the bank account and that of the peyments for the performence bonus It is appropriate and necessary to discount the endorsement contract using the bank account's emective interest rate because of differences in the timing of the compounding of the bank account and that of the payments on the endorsement contract 2The local car dealer creating Gavin's endorsement contract can earn 6% (compounded quarterty) on her deposited funds. She would have to deposit each quartor, starting exacty two years before the day Gavin signs his contract, to fund her endonsement contract [Note: The future value interest factor of 6% compounded quarterly for eight quarterly periods s a4328]
