Attempts: Do No Harm: [37 1. Application of Time Value of Money Skills A: Aa a 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 (AM-level baseball team, the Dodge City Cowboys; 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, Saleem received the following email from his agent, George Get-d'Bucks, indicating that he is being called up to the Wichita Wizards, the Cowboys's corresponding Major League Baseball (MLB) team. Moreover, Saleem's contract is being revised to reect his new status. The email describes the general terms and conditions of Saleem's revised contract. From: George Get-d'Bucks To: Saleem Swingman Subject: New Team, New Contract Proposal Saleem, Congratulations! 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 again! Salary and Incentives: o Saleem Swingman, hereafter referred to as the \"Player,\" is offered afouryear contract with an annual salary of $414,000 per Saleem is so excited! According to George, the contract is worth $2,244,4DDassuming receipt of all possible bonuses. After rereading the email twice and calling his family, Saleem called you to review the terms of the contract and verify George's calculations. After an extended conversation about what he'll do with his newfound wealth, you and Saleem have agreed that any funds received could be invested to earn 6.5000015), 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: I 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 year(s), unless specifically stated differently. Their value should be based on the salary in effect at the time the bonuses were earned. I The endorsement proceeds are paid in accordance with the terms of the deal. e 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. 0 Round all dollar amounts to the nearest whole dollar and carry out all interest rate factors to four decimal places. Session Saleem Swingman's Contract Evaluation Worksheet A B C D E F 1 Assumptions and Calulated Values 2 Bank Rate Information: Saleem's Bank Account Rate (compounded monthly) Monthly Bank Rate Effective Interest Rate Salary and Bonus Information: Year 1 Year 2 Total value Annual Salary (4% COLA adjustment) $414,000 $430,560 Monthly Salary O Discount factor (based on Cell B4 above) $1,510,551 l-' l-' Discounted Monthly Salary Time-in-League Bonus $10,000 Discount factor (based on Cell B4 above) Discounted Ti me-in-League Bonus Milestone Bonus $300,000 Discount factor (based on Cell B5 above) Discounted Milestone Bonus Performance Bonus $67,167 $258,435 Discount factor (based on Cell B5 above) . 0.7716 Discounted Performance Bonus Monthly Endorsement Contract Payment $2,750 Discount factor (based on Cell B4 above) 10.8605 Discounted Monthly Endorsement Payment $29,866 Contract's Total Nominal Value 30 Contract's Total Discounted Value $1,996,049 - g - E i a g E g 1. Given your worksheet calculations, which of the following statements is accurate? George's estimate of the value of Saleem's contract accurate on either a nominal or discounted basis? I] It is appropriate and necessary to discount the performance bonus 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 for the performance bonus. [I 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. I] George's estimate of the value of Saleem's contract is incorrect on a nominal basis, and the error is $46,937. 2. The local car dealer creating Saleem's endorsement contract can earn 6% (compounded quarterly) on her deposited funds. She would have to deposit ':I 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.] E