As the son of a Major League Baseball (MLB) player, Issac Itsouttahere has been playing baseball since he was old enough to hold a bat, and he has always dreamed of following in his father's footsteps. For the past four years, he's been the starting center fielder for the Moab Mountain Goats, a double-A (AA)-level baseball team. Last year, based on his outstanding fielding and hitting record, including 124 runs batted in (RBI) and 27 home runs, he was selected to receive the Minor League Player of the Year award. Yesterday, in a telephone conversation with his agent, Marty Fineprint, Issac learned that he's being called up to the big leagues and traded to the Wichita Wizards! In fact, he's supposed to report to the coach of the Wizards next Monday. To add another source of change to his world, Issac and Marty must negotiat a new contract with Alex Jordan, the general manager of the Wizards. Issac and Marty are having a prenegotiation conversation Marty Issac, we need to review and agree on the numbers and provisions that I'm going to propose to Alex later this afternoon. Issac Cool! I am so excited! I checked the league standings this morning, and the Wizards are currently in second place in the league. My dad said that they are on fire so far this season, and if they can continue their current level of performance, they no, I mean we-could qualify for the playoffs by mid-September. Wouldn't that be incredible? Marty Yeah, kid, it would. But let's focus on today's contract negotiations. I want your input, so let's run down my list of thoughts, and then we can talk about your move a nd your transition to Wichita. Issac Ok, what's on your list? Marty First, I'm proposing a three-year salary equal to 15% greater than the MLB's minimum player salary of $414,000. This should bring your annual salary to $476,100 per year for each of the next three years. My rationale is that if you do really well during the next three years, then we can renegotiate your contract sooner and go for the really big bucks in three-rather than in four or five-years. Remember that you will be paid at the end of each month, and don't worry about the effect of taxes at this stage of the deal. We'll worry about your federal and state taxes once we meet with your financial planner So now, let's think about the other terms of your contract. I'm thinking that we proposean allowance of $7,500 to pay for your moving expenses, to be paid when the contract is signed, a signing bonus of $15,000, and a performance bonus. I've also lined up your first endorsement contract for you. Issac Great! But two quick questions. First, when would the signing bonus be paid? Second, what type of performance bonus are you thinking about? Marty In the case of the signing bonus,I think, given your ability to manage money, we should ask that you receive one-third of the bonus at the beginning of each year of your contract. I think we capitalize on your fielding and batting performance last year and ask for a 15% bonus if you are designated as the league's Most Valuable Player (MVP). Oh, and don't forget, you're also eligible for a $10,000 time-in-league bonus if you remain on the roster for six months. This bonus is usually paid at the end of the first year of your contract. The last important detail is the endorsement deal that I've found for you. A restaurant owner in Wichita will pay you $250 per month to spend a maximum of 12 hours per month meeting and greeting her guests on nongame nights. In return for your payments -and a free meal on the nights you appearyou will sign autographs and have your picture taken with guests. As of today, the restaurant owner is only willing to commit to a one-year contract. Issac That sounds good. But how much is all this going to add up to? It sounds like an awful lot of money, so what am I going to do with it all? Spend it? Save and invest it? Marty As we discussed when you signed your contract with my firm, I have a financial advisor that's going to help you answer those questions. You have an appointment to talk with her tomorrow, but I think it is reasonable to assume that you can eam a 8.5000%, compounded monthly, on your funds during the term of your contract. In the meantime, I'll be talking with Alex Jordan to see how much of what I propose that the Wizards are willing to pay How about if you spend some time computing how much money you're actually going to make-net of my commission and your taxes-if Alex accepts our proposal? Don't forget that your bonuses are taxed as ordinary income. Issac Ok, I'll give it a try. I remember some of the time value of money techniques that I learned in my college finance class. Perhaps we can review my results after you've had your conversation with Mr. Jordan and we have a better idea of the contract numbers? Marty Issac, that sounds like an excellent plan. When we hang up, I'll email you a worksheet that you can use if you'd like. 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 As the son of a Major League Baseball (MLB) player, Issac Itsouttahere has been playing baseball since he was old enough to hold a bat, and he has always dreamed of following in his father's footsteps. For the past four years, he's been the starting center fielder for the Moab Mountain Goats, a double-A (AA)-level baseball team. Last year, based on his outstanding fielding and hitting record, including 124 runs batted in (RBI) and 27 home runs, he was selected to receive the Minor League Player of the Year award. Yesterday, in a telephone conversation with his agent, Marty Fineprint, Issac learned that he's being called up to the big leagues and traded to the Wichita Wizards! In fact, he's supposed to report to the coach of the Wizards next Monday. To add another source of change to his world, Issac and Marty must negotiat a new contract with Alex Jordan, the general manager of the Wizards. Issac and Marty are having a prenegotiation conversation Marty Issac, we need to review and agree on the numbers and provisions that I'm going to propose to Alex later this afternoon. Issac Cool! I am so excited! I checked the league standings this morning, and the Wizards are currently in second place in the league. My dad said that they are on fire so far this season, and if they can continue their current level of performance, they no, I mean we-could qualify for the playoffs by mid-September. Wouldn't that be incredible? Marty Yeah, kid, it would. But let's focus on today's contract negotiations. I want your input, so let's run down my list of thoughts, and then we can talk about your move a nd your transition to Wichita. Issac Ok, what's on your list? Marty First, I'm proposing a three-year salary equal to 15% greater than the MLB's minimum player salary of $414,000. This should bring your annual salary to $476,100 per year for each of the next three years. My rationale is that if you do really well during the next three years, then we can renegotiate your contract sooner and go for the really big bucks in three-rather than in four or five-years. Remember that you will be paid at the end of each month, and don't worry about the effect of taxes at this stage of the deal. We'll worry about your federal and state taxes once we meet with your financial planner So now, let's think about the other terms of your contract. I'm thinking that we proposean allowance of $7,500 to pay for your moving expenses, to be paid when the contract is signed, a signing bonus of $15,000, and a performance bonus. I've also lined up your first endorsement contract for you. Issac Great! But two quick questions. First, when would the signing bonus be paid? Second, what type of performance bonus are you thinking about? Marty In the case of the signing bonus,I think, given your ability to manage money, we should ask that you receive one-third of the bonus at the beginning of each year of your contract. I think we capitalize on your fielding and batting performance last year and ask for a 15% bonus if you are designated as the league's Most Valuable Player (MVP). Oh, and don't forget, you're also eligible for a $10,000 time-in-league bonus if you remain on the roster for six months. This bonus is usually paid at the end of the first year of your contract. The last important detail is the endorsement deal that I've found for you. A restaurant owner in Wichita will pay you $250 per month to spend a maximum of 12 hours per month meeting and greeting her guests on nongame nights. In return for your payments -and a free meal on the nights you appearyou will sign autographs and have your picture taken with guests. As of today, the restaurant owner is only willing to commit to a one-year contract. Issac That sounds good. But how much is all this going to add up to? It sounds like an awful lot of money, so what am I going to do with it all? Spend it? Save and invest it? Marty As we discussed when you signed your contract with my firm, I have a financial advisor that's going to help you answer those questions. You have an appointment to talk with her tomorrow, but I think it is reasonable to assume that you can eam a 8.5000%, compounded monthly, on your funds during the term of your contract. In the meantime, I'll be talking with Alex Jordan to see how much of what I propose that the Wizards are willing to pay How about if you spend some time computing how much money you're actually going to make-net of my commission and your taxes-if Alex accepts our proposal? Don't forget that your bonuses are taxed as ordinary income. Issac Ok, I'll give it a try. I remember some of the time value of money techniques that I learned in my college finance class. Perhaps we can review my results after you've had your conversation with Mr. Jordan and we have a better idea of the contract numbers? Marty Issac, that sounds like an excellent plan. When we hang up, I'll email you a worksheet that you can use if you'd like. 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