6. Application of Time Value of Money Skills Saleem Swingman 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 Piayer of the Year award. Using his 96 mph fastboll, an impeccable curve ball and slider, and a rellable changeup pitch, he achieved a 163 inin-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, Saleem received the foliowing emall from his agent, Steven Sign'em-Now, indicating that he is being called up to the El Paso Grandies, the Baidies's corresponding Major League Baseball (MLB) team. Moreover, Saleem's contract is being revised to reflect his new status. The emall describes the general terms and conditions of Saleem's revised contract. From: Steven Sign'em-Now To: Saleem Swingman Subject: New Team, New Contract Proposal saleem, Congratulationsi You've been called up to the El Paso Grandies. Below are the offered terms and conditions of your new contract. Arer you review them and think about the offer, call me and we?l discuss your options. Congrats againt Salary and incentivest - Saleam Swingman hereatter referred to as the "Player," is offered a four-year contract with an annual sa'ary of $414,000 per year, to be paid at the end of each month in the contract term. - Under the iesgue's coliective bargaining agreement, the Player will receive a Salary and Incentives: - Saleem Swingman hereafter referred to as the "Player," is offered a four-year contract with an annual salary of $414,000 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 receive a one-time $10,000 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 milestone bonus. Both are intended to encourage outstanding performance. - The Player is offered the following award-based performance incentive: a 15% bonus if he is selected for consideration of a major award-such as the Cy Young Award (for outstanding pitching). The Player is also offered the following milestone bonus: a $75,000 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 Grandies, I've also been able to secure the following endorsement opportunity: In addition to the proposal offered by the Grandies, 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 Grandies and will take effect immedlately upon signing your MLB 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 youl Take care, Steven Steven Sign'em-Now Sports Agent, RsR Talent Management Inc. I EI Paso Saleem is so excitedi According to Steven, the contract is worth $2,244,400-assuming receipt of all possible bonuses. After rereading the email twice and caling his family, Saleem called you to review the terms of the contract and verify steven's calculations. After an extended conversation about what hell do with his newfound wealth, you and Saleem have agreed that any funds recelved could be invested to earn 5.00%, compounded monthly. Complete the following worksheet by inserting the appropriate valion 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 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 avallable 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. Saleem Swingman's Contract Evaluation Worksheet 1 Assumptions and Calculated Values 2 Bank Rate Information: 3 Saleem's Bank Account Rate (compounded monthly) 4 Monthly Bank Rate 5 Effective Annual Interest Rate \begin{tabular}{ll} 6 & \\ 7 & Salary and Bonus \\ 8 Information: \\ 8 Annual Salary (4\% COLA) \\ 9 Monthly Salary \\ 10 Discount factor (based on \\ 11 Dell B4 above) \\ \hline 12 Discounted Annual Salary \end{tabular} 12 13 Time-in-League Bonus 14 Discount factor (based on Cell B4 above) 15 Discounted Time-in. League Bonus 16 Cell BS above) 19 Discounted Milestone 16 Cell B5 above) 19 Discounted Milestone Bonus 20 24252621Dcountfactor(based27CellB4above)MonthlyEndorsementContractPayment Endorsement Payment 28 29 Contract's Total Nominal Value 30 Contract's Total Discounted Value 1. Given your worksheet calculations, which of the following statements is accurate? Is Steven's estimate of the value of Saleem's contract accurate on either a nominal or discounted basis? Check all that apply. Steven's estimate of the value of Saleem's contract is incorrect on a nominal basis, and the error is $46,938. 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. Steven's estimate of the nominal value of Saleem's contract is correct. Related Question: The local car dealer creating Saleem's endorsement opportunity can earn 6\% (compounded quarterly) on his deposited fund5. She would have to deposit each quarter, starting exactly two years before the day Saleem 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. ] 6. Application of Time Value of Money Skills Saleem Swingman 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 Piayer of the Year award. Using his 96 mph fastboll, an impeccable curve ball and slider, and a rellable changeup pitch, he achieved a 163 inin-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, Saleem received the foliowing emall from his agent, Steven Sign'em-Now, indicating that he is being called up to the El Paso Grandies, the Baidies's corresponding Major League Baseball (MLB) team. Moreover, Saleem's contract is being revised to reflect his new status. The emall describes the general terms and conditions of Saleem's revised contract. From: Steven Sign'em-Now To: Saleem Swingman Subject: New Team, New Contract Proposal saleem, Congratulationsi You've been called up to the El Paso Grandies. Below are the offered terms and conditions of your new contract. Arer you review them and think about the offer, call me and we?l discuss your options. Congrats againt Salary and incentivest - Saleam Swingman hereatter referred to as the "Player," is offered a four-year contract with an annual sa'ary of $414,000 per year, to be paid at the end of each month in the contract term. - Under the iesgue's coliective bargaining agreement, the Player will receive a Salary and Incentives: - Saleem Swingman hereafter referred to as the "Player," is offered a four-year contract with an annual salary of $414,000 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 receive a one-time $10,000 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 milestone bonus. Both are intended to encourage outstanding performance. - The Player is offered the following award-based performance incentive: a 15% bonus if he is selected for consideration of a major award-such as the Cy Young Award (for outstanding pitching). The Player is also offered the following milestone bonus: a $75,000 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 Grandies, I've also been able to secure the following endorsement opportunity: In addition to the proposal offered by the Grandies, 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 Grandies and will take effect immedlately upon signing your MLB 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 youl Take care, Steven Steven Sign'em-Now Sports Agent, RsR Talent Management Inc. I EI Paso Saleem is so excitedi According to Steven, the contract is worth $2,244,400-assuming receipt of all possible bonuses. After rereading the email twice and caling his family, Saleem called you to review the terms of the contract and verify steven's calculations. After an extended conversation about what hell do with his newfound wealth, you and Saleem have agreed that any funds recelved could be invested to earn 5.00%, compounded monthly. Complete the following worksheet by inserting the appropriate valion 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 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 avallable 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. Saleem Swingman's Contract Evaluation Worksheet 1 Assumptions and Calculated Values 2 Bank Rate Information: 3 Saleem's Bank Account Rate (compounded monthly) 4 Monthly Bank Rate 5 Effective Annual Interest Rate \begin{tabular}{ll} 6 & \\ 7 & Salary and Bonus \\ 8 Information: \\ 8 Annual Salary (4\% COLA) \\ 9 Monthly Salary \\ 10 Discount factor (based on \\ 11 Dell B4 above) \\ \hline 12 Discounted Annual Salary \end{tabular} 12 13 Time-in-League Bonus 14 Discount factor (based on Cell B4 above) 15 Discounted Time-in. League Bonus 16 Cell BS above) 19 Discounted Milestone 16 Cell B5 above) 19 Discounted Milestone Bonus 20 24252621Dcountfactor(based27CellB4above)MonthlyEndorsementContractPayment Endorsement Payment 28 29 Contract's Total Nominal Value 30 Contract's Total Discounted Value 1. Given your worksheet calculations, which of the following statements is accurate? Is Steven's estimate of the value of Saleem's contract accurate on either a nominal or discounted basis? Check all that apply. Steven's estimate of the value of Saleem's contract is incorrect on a nominal basis, and the error is $46,938. 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. Steven's estimate of the nominal value of Saleem's contract is correct. Related Question: The local car dealer creating Saleem's endorsement opportunity can earn 6\% (compounded quarterly) on his deposited fund5. She would have to deposit each quarter, starting exactly two years before the day Saleem 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. ]