Colin Closer 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 Roswell Extraterrestrials; last year, he was the first runner-up for the Minor League Player of the Year award. Using his 97mph fastball, an impeccable curve ball and slider, and a reliable changeup pitch, he achieved a 17-3 win-loss record, an earned run average (ERA) of 2.84, and 108 strikeouts in 123.1 innings pitched. He is also your best friend. Two weeks ago, on his three-year anniversary with the team, Colin received the following email from his agent, Marty Fineprint, indicating that he is being called up to the Boston Back Bay Boys, the Extraterrestrials's corresponding Major League Baseball (MLB) team. Moreover, Colin's contract is being revised to reflect his new status. The email describes the general terms and conditions of Colin's revised contract. - Colin Closer 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. - The Player is offered a performance-based bonus, as well as a milestone bonus. Both are intended to encourage outstanding performance. - The Player is offered the following award-based performance incentive: a 15% bonus if he is selected for consideration of a major award-such as the Cy Young Award (for outstanding pitching). The Player is also offered the following milestone bonus: a $75,000 bonus if he ties Nolan Ryan's 1973 single-season strikeout record (383 strikeouts). - The Player is eligible for each potential bonus each year that the contract is in effect and, if expressed as a percentage, will be based on the value of the Player's base annual salary for the corresponding year. If earned, the performance and milestone bonuses will be distributed in a single payment at the beainnina of the next contract vear. Althouah this prooosal describes onlv Colin is so excited! According to Marty, the contract is worth $2,560,400-assuming receipt of all possible bonuses. After rereading the email twice and calling his family, Colin called you to review the terms of the contract and verify Marty's calculations. After an extended conversation about what he'l do with his newfound wealth, you and Colin have agreed that any funds received could be invested to earn 6.50%, compounded monthly. Rate 20 \begin{tabular}{ll|l|l|} \hline 21 & Performance Bonus & & $ \end{tabular} Bonus 24 25 Monthly Endorsement $$ Contract Payment \begin{tabular}{llll} 26 & Discount factor (based on & 11.5880 & 10.8606 \\ & Cell B4 above) & & \\ 27 & Discounted Monthly & $ \\ \hline \end{tabular} \begin{tabular}{|l|} \hline$ \\ \hline \end{tabular} $ Discountad Monthly Endorsement Payment 28 29 Contract's Total Nominal Value 30 Contract's Total Discounted Value 1. Given your worksheet calculations, which of the following statements is accurate? Is Marty's estimate of the value of Colin's contract accurate on either a nominal or discounted basis? Check all that apply. Marty's estimate of the value of Colin's contract is incorrect on a nominal basis, and the error is $28,088. 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. Marty's estimate of the nominal value of Colin's contract is correct. Related Question: The local car dealer creating Colin's endorsement opportunity can earn 6% (compounded quarterly) on his deposited funds. She would have to deposit each quarter, starting exactly two years before the day Colin 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. ]