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

earned run average $($ERA$)$ of $2\mathrm{.}23,$ and $166$ strikeouts in $147\mathrm{.}2$ innings pitched. He is also your best friend.

he is being called up to the Wichita Wizards, the Cowboys's corresponding Major League Baseball $($MLB$)$ team. Moreover, Nick's contract is being

revised to reflect his new status. The email describes the general terms and conditions of Nick's revised contract.

Nick Nohitter hereafter referred to as the "Player," is offered a four$-$year

contract with an annual salary of $$474,000$ 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 $$20,000$ 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.

Nick is so excited! According to Michael, the contract is worth $$2,560,400-$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 Michael'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 $8\mathrm{.}50\%,$ compounded monthly.