Harry Hurler 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 Yakima Hops; last year, he was the first runner-up for the Minor League Player of the Year award. Using his 93 mph fastball, an impeccable curve ball and slider, and a reliable changeup pitch, he achieved a 15-2 win-loss record, an earned run average (ERA) of 2.76, and 123 strikeouts in 99.1 innings pitched. He is also your best friend. Two weeks ago, on his three-year anniversary with the team, Harry received the following email from his agent, Noah Never-Enough, indicating that he is being called up to the Wichita Wizards, the Hops's corresponding Major League Baseball (MLB) team, Moreover, Harry's contract is being revised to reflect his new status. The email describes the general terms and conditions of Harry's revised contract. From: Noah Never-Enough To: Harry Hurler Subject: New Team, New Contract Proposal Harry, Congratulationst 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 againt Salary and Incentives: Harry Hurler, hereafter referred to as the "Player, is offered a four-year contract with an annual salary of $564,000 per year, to Harry is so excitedi According to Noah, the contract is worth $3,234,400-assuming receipt of all possible bonuses. After rereading the email twice and calling his family, Harry 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 Harry have agreed that any funds received could be invested to earn 6.5000%, 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 eamed 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. B D. F 1 Assumptions and Calulated Values 2 Bank Rate Information: 3 Harry's Bank Account Rate (compounded monthly) 6.5000% 4. Monthly Bank Rate 0.5417% Effective Interest Rate 6.6972% 5. 6. 7 Salary and Bonus Information: Year 1 Year 2 Year 3 Year 4 Total value 8 Annual Salary (4% COLA adjustment) Monthly Salary $564,000 $586,560 47,000 48,880 10 Discount factor (based on Cell B4 above) 11.5879 10.8605 10.1788 9.5398 11 Discounted Monthly Salary 497,540 $2,057,988 12 13 Time-in-League Bonus $10,000 14 Discount factor (based on Cell B4 above) 0.9681 15 Discounted Time-in-League Bonus 16 17 Milestone Bonus 18 Discount factor (based on Cell B5 above) 19 Discounted Milestone Bonus $150,000 $600,000 0.9372 0.8784 0.8233 0.7716 $131,760 20 21 Performance Bonus 22 23 Discounted Performance Bonus $91,503 $352,071 Discount factor (based on Cell B5 above) 0.9372 0.8784 0.8233 0.7716 $77,285 24 25 Monthly Endorsement Contract Payment $2,750 26 Discount factor (based on Cell 84 above) 11.5879 10.8605 27 Discounted Monthly Endorsement Payment $29,866 28 29 Contract's Total Nominal Value 30 Contract's Total Discounted Value $2,878,857 1. Given your worksheet calculations, which of the following statements is accurate? Noah's estimate of the value of Harry's contract accurate on either a nominal or discounted basis? Noah's estimate of the value of Harry's contract is incorrect on a nominal basis, and the error is $46,937. O 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. O Noah's estimate of the nominal value of Harry's contract is correct. 2. The local car dealer creating Harry'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 Harry signs his contract, to fund her endorsement contract. [Note: The future value interest factor of 6% compounded quarteriy for eight quarterly periods is 8.4328.]