16. Application of Time Value of Money Skills Gavin Goldenarm has been playino baseball since he was five years old and has always dreamed of plaving in the big leagues. Last season, he was a starting pitcher for a double-A (AA)-Level basehall team, the Pooswell Extraterrestrialsi last yeac, he was the first runner-up for the Minor League Player of the Year award. Ueing his 93 moh tatball, an impeccable carve ball and sides, and a reliable changeup pitch, hie achieved a 15-2 win-loss record, an earned run average (ERA) of 2.75, and 123 stikeouts in 99.1 innings pitched. He is also your best friend. Two weeks apo, on his three-year anniversary with tha team, Gavin recelved the following email from has agent, Noah Never-Enough, indicating that. he is being called up to the Wichita Wizards, the Extraterrestrais's corresponding Major League Baseball (MLE) team, Moreover, Gavin's contract is being revised to reflect his new gtatus. The emall describes the general terms and conditions of Gavin's revised contract: Noah Never-Enough Gavin Goldenarm ject: New Team, New Contract Proposal Congratulationsi 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'l discuss your options. Congrats again! Salary and Incentives: - Gavin Goldenarm hereafter referred to as the "Player," is offered a four-year contract with an annual salary of $444,000 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 receive 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 MLB 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 miliestone bonus. Both are intended to encourage outstanding performance. - The Player is offered the following award-based performance incentive: a 15% bonus dayable at the end of the operating year if he is selected to play in the All-star pame. The Player is aico offered the following milestone bonus: a $150,000 bonus if he ties *olan Ryan's. 1973 single-seasan strikeout record {383. strikeouts ). - The player is ellible 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 Piayer's base annial saiary for the corresponding vear, if eamed, the performance and milestone bonises will be distributed in a fingle payment at the beainuinig of the pext contract vear, Although this profosal describes only one milestone, the actual contract containe sesiefal propressive milestoner, - 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 payable at the end of the operating vear if he is selected to play in the All-5tar game. The Player is also offered the following milestone bonus: a $150,000 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 millestone, the actual contract contains several progressive millestones. Exceeding one milestone creates the opportunity to exceed another. In addition to the proposal offered by the wizards, I've also been able to secure the following endorsement opportunity: A local car dealer has offered you a contract that will pay. $2,750 per month for two years. This contract is contingent on your accepting the contract with the Wizards and will take effect immediately upon signing your MLB contract. In return for these payments, vou wil participate in the dealer's promotional events, such as signing-autographs and allowing photographs as requested. Live also attached a worksheet that you can use to analyzeithe deal. I'm in negotiations for the rest of the day, so let's discuss your thoughts on the contract probosal tomotrow. I'm proud of youl Take care. Noan NoahiNeversenouph Sport Agenti is. Talent Management tnc: I Wichita Gavin is so excitedl According to Noah, the contract is worth 32,702,400-assuming receipt of all possible bonuses. After rereading the email twice and calling his family, Gavin called you to revlew the terms of the contract and verify Noah's calculations. After an extended conversation about what hell do with his newfound wealth, you and Gavin have agreed that any funds received could be invested to earn 5.505, compounded monthly. Contract Evaluation Worksheet Complete the following worksheet by inserting the approoriate values to evaluate the contract and answer the related questions. Note: To darify possible sources of contusion and simplify your calculations: - Assume that all bonuses are eamnd in each of the years for which they are avallable and are paid at the end of the corresponding vear(s), unesess spechically stated ditterently. Their value should be based on the salary in effect at the time the bonuses were earned. - The eodorsement proceeds are naid in accordance with the terms of the deal. - Remember that the timine of a cash flow affects the interest rate that is used to discount the cash flow. For example, annual interest ratec should be used to discount annual caah flows, and monthly Interet rates aie used to discount monthly cash llows. Therefare: at maxy be necestary to combute the approcriate interest rate that should be used in a discounting calculation. - Round all doliar amounts to the nearest whiole dolar and carry cut allistereat fate fastors to four dedinal daces. - When entering intermediate values as answet thoices, be sure to rounid them to the nearest dollar, however when veling those same valies to calculate ancther answer, do nod rounit. Gavin Goldenarm's Contract Evaluation Worksheet 1. Given vour worksheet calculations, which of the following statements is accurate? is Noah's estimate of the value of Gavin's contract accurate on either a nominal or discounted basis? Check all that dopli. It is appropriate and necessary to discount the performance beniss using the bank account's effective annual interest rate because of ditferences in the timiligg of the compounsing of the bank: account and that of the payments for the performance bonus: Fioah's tastimate of the value of Gavin's contract is intorrect on a nominal basis, and the error is $37,512. It is a peptopiate and necessary to discotnt the endforsement contcact using the bank account's effective anntat interest rate because of differences in the timing of the compounding of then bank account and that of the payments on this endorsement contract. wrould tiave fo deposit, eath qcartef starting exactly tive years before the day Gavis sighs hils contract, co fund her endorseatent 16. Application of Time Value of Money Skills Gavin Goldenarm has been playino baseball since he was five years old and has always dreamed of plaving in the big leagues. Last season, he was a starting pitcher for a double-A (AA)-Level basehall team, the Pooswell Extraterrestrialsi last yeac, he was the first runner-up for the Minor League Player of the Year award. Ueing his 93 moh tatball, an impeccable carve ball and sides, and a reliable changeup pitch, hie achieved a 15-2 win-loss record, an earned run average (ERA) of 2.75, and 123 stikeouts in 99.1 innings pitched. He is also your best friend. Two weeks apo, on his three-year anniversary with tha team, Gavin recelved the following email from has agent, Noah Never-Enough, indicating that. he is being called up to the Wichita Wizards, the Extraterrestrais's corresponding Major League Baseball (MLE) team, Moreover, Gavin's contract is being revised to reflect his new gtatus. The emall describes the general terms and conditions of Gavin's revised contract: Noah Never-Enough Gavin Goldenarm ject: New Team, New Contract Proposal Congratulationsi 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'l discuss your options. Congrats again! Salary and Incentives: - Gavin Goldenarm hereafter referred to as the "Player," is offered a four-year contract with an annual salary of $444,000 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 receive 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 MLB 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 miliestone bonus. Both are intended to encourage outstanding performance. - The Player is offered the following award-based performance incentive: a 15% bonus dayable at the end of the operating year if he is selected to play in the All-star pame. The Player is aico offered the following milestone bonus: a $150,000 bonus if he ties *olan Ryan's. 1973 single-seasan strikeout record {383. strikeouts ). - The player is ellible 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 Piayer's base annial saiary for the corresponding vear, if eamed, the performance and milestone bonises will be distributed in a fingle payment at the beainuinig of the pext contract vear, Although this profosal describes only one milestone, the actual contract containe sesiefal propressive milestoner, - 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 payable at the end of the operating vear if he is selected to play in the All-5tar game. The Player is also offered the following milestone bonus: a $150,000 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 millestone, the actual contract contains several progressive millestones. Exceeding one milestone creates the opportunity to exceed another. In addition to the proposal offered by the wizards, I've also been able to secure the following endorsement opportunity: A local car dealer has offered you a contract that will pay. $2,750 per month for two years. This contract is contingent on your accepting the contract with the Wizards and will take effect immediately upon signing your MLB contract. In return for these payments, vou wil participate in the dealer's promotional events, such as signing-autographs and allowing photographs as requested. Live also attached a worksheet that you can use to analyzeithe deal. I'm in negotiations for the rest of the day, so let's discuss your thoughts on the contract probosal tomotrow. I'm proud of youl Take care. Noan NoahiNeversenouph Sport Agenti is. Talent Management tnc: I Wichita Gavin is so excitedl According to Noah, the contract is worth 32,702,400-assuming receipt of all possible bonuses. After rereading the email twice and calling his family, Gavin called you to revlew the terms of the contract and verify Noah's calculations. After an extended conversation about what hell do with his newfound wealth, you and Gavin have agreed that any funds received could be invested to earn 5.505, compounded monthly. Contract Evaluation Worksheet Complete the following worksheet by inserting the approoriate values to evaluate the contract and answer the related questions. Note: To darify possible sources of contusion and simplify your calculations: - Assume that all bonuses are eamnd in each of the years for which they are avallable and are paid at the end of the corresponding vear(s), unesess spechically stated ditterently. Their value should be based on the salary in effect at the time the bonuses were earned. - The eodorsement proceeds are naid in accordance with the terms of the deal. - Remember that the timine of a cash flow affects the interest rate that is used to discount the cash flow. For example, annual interest ratec should be used to discount annual caah flows, and monthly Interet rates aie used to discount monthly cash llows. Therefare: at maxy be necestary to combute the approcriate interest rate that should be used in a discounting calculation. - Round all doliar amounts to the nearest whiole dolar and carry cut allistereat fate fastors to four dedinal daces. - When entering intermediate values as answet thoices, be sure to rounid them to the nearest dollar, however when veling those same valies to calculate ancther answer, do nod rounit. Gavin Goldenarm's Contract Evaluation Worksheet 1. Given vour worksheet calculations, which of the following statements is accurate? is Noah's estimate of the value of Gavin's contract accurate on either a nominal or discounted basis? Check all that dopli. It is appropriate and necessary to discount the performance beniss using the bank account's effective annual interest rate because of ditferences in the timiligg of the compounsing of the bank: account and that of the payments for the performance bonus: Fioah's tastimate of the value of Gavin's contract is intorrect on a nominal basis, and the error is $37,512. It is a peptopiate and necessary to discotnt the endforsement contcact using the bank account's effective anntat interest rate because of differences in the timing of the compounding of then bank account and that of the payments on this endorsement contract. wrould tiave fo deposit, eath qcartef starting exactly tive years before the day Gavis sighs hils contract, co fund her endorseatent