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Application of Time Value of Money Skills Flynn Fireballer has been playing baseball since he was five years old and has always dreamed of playing
Application of Time Value of Money Skills
Flynn Fireballer 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 doubleA AAlevel baseball team, the Roswell Extraterrestrials; last year, he was the first runnerup for the Minor League Player
of the Year award. Using his fastball, an impeccable curve ball and slider, and a reliable changeup pitch, he achieved a winloss record,
an earned run average ERA of and strikeouts in innings pitched. He is also your best friend.
Two weeks ago, on his threeyear anniversary with the team, Flynn received the following email from his agent, Marty Fineprint, indicating that he is
being called up to the Mobile Bayhoppers, the Extraterrestrials's corresponding Major League Baseball MLB team. Moreover, Flynns contract is being
revised to reflect his new status. The email describes the general terms and conditions of Flynns revised contract.
Flynn is so excited! According to Marty, the contract is worth $ assuming receipt of all possible bonuses. After rereading the email twice
and calling his family, Flynn called you to review the terms of the contract and verify Marty's calculations. After an extended conversation about what
he'll do with his newfound wealth, you and Flynn have agreed that any funds received could be invested to earn 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
years 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.
Flynn Fireballer's Contract Evaluation Worksheet
TimeinLeague Bonus
Discount factor based on
Cell B above
Discounted TimeinLeague
Bonus
Milestone Bonus
Discount factor based on
Cell B above
Discounted Milestone Bonus
Performance Bonus
$
Discount factor based on
Cell B above
Discounted Performance
Bonus
Monthly Endorsement
Contract Payment
Discount factor based on
Cell B above
Discounted Monthly
Endorsement Payment
Contract's Total NominalCell B above
Discounted Monthly
Endorsement Payment
Contract's Total Nominal
Value
Contract's Total Discounted
Value
Given your worksheet calculations, which of the following statements is accurate? Is Marty's estimate of the value of Flynns contract accurate on
either a nominal or discounted basis? Check all that apply.
Marty's estimate of the value of Flynns contract is incorrect on a nominal basis, and the error is $
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.
Related Question: The local car dealer creating Flynns endorsement opportunity can earn compounded quarterly on his deposited funds. She
would have to deposit each quarter, starting exactly two years before the day Flynn signs his contract, to fund her endorsement
contract. Note: The future value interest factor of compounded quarterly for eight quarterly periods is
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