16. Application of Time Value of Money Skills Nick Nohitter 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 96 mph fastball, an impeccable curve ball and slider, and a reliable changeup pitch, he achieved a 16-3 win-loss record, an earned run average (ERA) of 2.98, and 146 strikeouts in 117.0 innings pitched. He is also your best friend. Two weeks ago, on his three-year anniversary with the team, Nick received the following email from his agent, Noah Never Enough, indicating that he is being called up to the El Paso Grandies, the Baldies's corresponding Major League Baseball (MLB) team. Moreover, Nick's contra ontract is being revised to reflect his new status. The email describes the general terms and conditions of Nick's revised contract. proposal tomorrow. I'm proud of you! Take care, Noah Noah Never-Enough Sports Agent, RER Talent Management Inc. | El Paso Nick is so excited! According to Noah, the contract is worth $3,134,400-assuming receipt of all possible bonuses. After rereading the email twice and calling his family, Nick called you to review the terms of the contract and verify Noah'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 earn 7.50%, 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. When entering intermediate values as answer choices, be sure to round them to the nearest dollar, however when using those same values to calculate another answer, do not round. 1 2 3 7.50 Assumptions and Calculated Values Bank Rate Information: Nick's Bank Account Rale (compounded monthly Monthly Bank Rate Effective Annual Interest Rate 4 5 0.6250% 7.7630 6 Year 1 Year 2 Year 3 Year 4 Total value $480.230 $499,440 $1,885,430 8 9 10 Salary and Bonus Information: Annual Salary (4% COLA) Monthly Salary Discount factor (based on Cell B4 above) Discounted Annual Salary $444,000 $37.000 $461,780 $38.480 10.6960 11.5264 9.9255 9.2105 12 13 0.9633 Time-in-League Bonus Discount factor (based on Cell BA above) Discounted Time-in- League Bonus 15 17 18 0.9280 0.8611 0.7991 0.7415 Milestone Bonus Discount factor (based on Cell B5 above) Discounted Milestone Bonus 19 20 21 22 0.9280 0.8611 0.7991 0.7415 Performance Bonus Discount factor (based on Cell B5 above) Discounted Performance Bonus 23 24 25 26 11.5264 10.6960 Monthly Endorsement Contract Payment Discount factor (based on Cell B4 above) Discounted Monthly Endorsement Payment 27 S 28 29 Contract's Total Nominal 30 Contract's Total Discounted Value 1. Given your worksheet calculations, which of the following statements is accurate? Is Noah's estimate of the value of Nick's contract accurate on either a nominal or discounted basis? Check all that apply. Noah's estimate of the value of Nick's contract is incorrect on a nominal basis, and the error is $74,814. 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. 16. Application of Time Value of Money Skills Nick Nohitter 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 96 mph fastball, an impeccable curve ball and slider, and a reliable changeup pitch, he achieved a 16-3 win-loss record, an earned run average (ERA) of 2.98, and 146 strikeouts in 117.0 innings pitched. He is also your best friend. Two weeks ago, on his three-year anniversary with the team, Nick received the following email from his agent, Noah Never Enough, indicating that he is being called up to the El Paso Grandies, the Baldies's corresponding Major League Baseball (MLB) team. Moreover, Nick's contra ontract is being revised to reflect his new status. The email describes the general terms and conditions of Nick's revised contract. proposal tomorrow. I'm proud of you! Take care, Noah Noah Never-Enough Sports Agent, RER Talent Management Inc. | El Paso Nick is so excited! According to Noah, the contract is worth $3,134,400-assuming receipt of all possible bonuses. After rereading the email twice and calling his family, Nick called you to review the terms of the contract and verify Noah'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 earn 7.50%, 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. When entering intermediate values as answer choices, be sure to round them to the nearest dollar, however when using those same values to calculate another answer, do not round. 1 2 3 7.50 Assumptions and Calculated Values Bank Rate Information: Nick's Bank Account Rale (compounded monthly Monthly Bank Rate Effective Annual Interest Rate 4 5 0.6250% 7.7630 6 Year 1 Year 2 Year 3 Year 4 Total value $480.230 $499,440 $1,885,430 8 9 10 Salary and Bonus Information: Annual Salary (4% COLA) Monthly Salary Discount factor (based on Cell B4 above) Discounted Annual Salary $444,000 $37.000 $461,780 $38.480 10.6960 11.5264 9.9255 9.2105 12 13 0.9633 Time-in-League Bonus Discount factor (based on Cell BA above) Discounted Time-in- League Bonus 15 17 18 0.9280 0.8611 0.7991 0.7415 Milestone Bonus Discount factor (based on Cell B5 above) Discounted Milestone Bonus 19 20 21 22 0.9280 0.8611 0.7991 0.7415 Performance Bonus Discount factor (based on Cell B5 above) Discounted Performance Bonus 23 24 25 26 11.5264 10.6960 Monthly Endorsement Contract Payment Discount factor (based on Cell B4 above) Discounted Monthly Endorsement Payment 27 S 28 29 Contract's Total Nominal 30 Contract's Total Discounted Value 1. Given your worksheet calculations, which of the following statements is accurate? Is Noah's estimate of the value of Nick's contract accurate on either a nominal or discounted basis? Check all that apply. Noah's estimate of the value of Nick's contract is incorrect on a nominal basis, and the error is $74,814. 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