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 Dodge City Cowboys; last year, he was the first runner-up for the Minor League Player of the Yest aword, Using his 97 mph fastball, an impeccable curve ball and stider, and a reliable changeup pitch, he achigved a 17 -3 win-loss record, an earned run aversge (ERA) of 2.54, and 10.5 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, Michael Make-dTeam, indicating that he is being called up to the Springfield Dusties, the Cowboys's corresponding Major League Baseball (MLB) team. Moreover, Colin's contract is being revised to reflect hic new stotus. The emsil desenbes the general terms and conditions of Colin's revised contract. From: Michael Make-d'Team To: Colin Closer Subject: New Team, New Contract Proposal Colin, Congratulations! You've been called up to the Springfield Dustles. Below are the offered terms and conditions of your new contract. After you review them and think about the offer, call me and we'l discuss your options. Congrats again! Salary and incentives: - Colin Closer hereafter referred to as the "Player," is offered a four-year contract with an annual salary of $504,000 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 recelve a 4% cost-of-lliving 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 recelve 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 complation of the sixemonthioniod. 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 designated as the Most valuable Player (MVP) in the league. The Player is also offered the following milestone bonus: a $150,000 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 beginning of the next contract year. Although this proposal describes only one milestone, the actual contract contains several progressive milestones. Exceeding one milestone creates the opportunity to exceed another. In addition to the proposal offered by the Dusties, I've also been able to secure the following endorsement opportunity: In addition to the proposal offered by the Dusties, I've also been able to secure the following endorsement opportunity: A local car dealer has offered you a contract that will pay $2,750 per month for two years. This contract is contingent on your accepting the contract with the Dusties and will take effect immediately upon signing your MLB contract. In return for these payments, you will participate in the dealer's promotional events, such as signing autographs and allowing photographs as requested. I've also attached a worksheet that you can use to analyze the deal. I'm in negotiations for the rest of the day, so let's discuss your thoughts on the contract proposal tomorrow. I'm proud of you! Take care, Michael Michael Make-d'Team Sports Agent, R\&R Talent Management Inc. I Springfield Colin is so excitedl According to Michoel, the controct is worth $2,993,400-assuming recelpt of all possible bonuses. After rereading the email twice and calling his fomily, Colin called you to revlew the terms of the contract and verify. Michael's calculations. After an oxtended conversation about what he'll do with his newfound wealth, you and Colin have agreed that any funds recelved could be invested to earn 7.50%, compounded monthly. Contract Evaluation Worksheet Complete the foliowing worksheet by interting the appropriste values to evaluate the contract and answer the reloted questions. Note: To ciarify possible sources of confusion and simplify your calculations: - Atsume that all bonuses are eorned in esch of the years for which they are dvallable and are paid at the end of the corresponding year(5). uniess specifically stated differentiy. Their value should be based on the salary in effect at the time the bonuses were earned. - The endersenuent proceeds are pald 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 examplo, annual interest rates should be used to discount annual cash flows, and monthly inkerest rates are used to discount monthly cash flows. Therefore, it moy be fectsiary to compute the appropriate interest rote that should be used in a discounting calculation. - Mound all dollar amountes to the nearest whole dollor and carry out all interest rate factors to four decimal placess. - When entering intermediate veluos as nhsner choices, be sure to round them to the nearest doller, howaver When using those some Folves to caitulate another answer, d0 not round. Colin Closer's Contract Evaluation Worksheet 11 Discounted Annual alary 12 13 Time-in-League Bonus 14 Oiscount factor (based on Cell B4 above) 15 Discounted Time-in-leogue Bonus:- 16 21 Performance Bonus 22 Dicount factor (bsees on Cell Bs noore) 23 Dicounted Performitice Eonus 24 W ther a nominal ac discounted bestan - ther a namanai ar discounted bas-8? Checis all that apply? 1. Given your workeheet calculobisns, which of the foliowing statements is accurate? Is Michaei's estimate of the value of Colin's contract accurate on elther oneminal of discounted bosis? Check all thot opply. Michael's estimate of the nominal value of Colin's contract is correct. It is appropriste and hecessnry to discount the performance bonus using the bank account's affective annual interest rete because of differences in the timing of the compounding of the bank accounk and that of the payments for the performance bonus. It is appropriate and necessiry 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. Related Question: The local car dealer creating Colin's endorsement opportunity can earn 674 (compounded quarterty) on his deposited funds. She would hove 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 0.4328. ] 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 Dodge City Cowboys; last year, he was the first runner-up for the Minor League Player of the Yest aword, Using his 97 mph fastball, an impeccable curve ball and stider, and a reliable changeup pitch, he achigved a 17 -3 win-loss record, an earned run aversge (ERA) of 2.54, and 10.5 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, Michael Make-dTeam, indicating that he is being called up to the Springfield Dusties, the Cowboys's corresponding Major League Baseball (MLB) team. Moreover, Colin's contract is being revised to reflect hic new stotus. The emsil desenbes the general terms and conditions of Colin's revised contract. From: Michael Make-d'Team To: Colin Closer Subject: New Team, New Contract Proposal Colin, Congratulations! You've been called up to the Springfield Dustles. Below are the offered terms and conditions of your new contract. After you review them and think about the offer, call me and we'l discuss your options. Congrats again! Salary and incentives: - Colin Closer hereafter referred to as the "Player," is offered a four-year contract with an annual salary of $504,000 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 recelve a 4% cost-of-lliving 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 recelve 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 complation of the sixemonthioniod. 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 designated as the Most valuable Player (MVP) in the league. The Player is also offered the following milestone bonus: a $150,000 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 beginning of the next contract year. Although this proposal describes only one milestone, the actual contract contains several progressive milestones. Exceeding one milestone creates the opportunity to exceed another. In addition to the proposal offered by the Dusties, I've also been able to secure the following endorsement opportunity: In addition to the proposal offered by the Dusties, I've also been able to secure the following endorsement opportunity: A local car dealer has offered you a contract that will pay $2,750 per month for two years. This contract is contingent on your accepting the contract with the Dusties and will take effect immediately upon signing your MLB contract. In return for these payments, you will participate in the dealer's promotional events, such as signing autographs and allowing photographs as requested. I've also attached a worksheet that you can use to analyze the deal. I'm in negotiations for the rest of the day, so let's discuss your thoughts on the contract proposal tomorrow. I'm proud of you! Take care, Michael Michael Make-d'Team Sports Agent, R\&R Talent Management Inc. I Springfield Colin is so excitedl According to Michoel, the controct is worth $2,993,400-assuming recelpt of all possible bonuses. After rereading the email twice and calling his fomily, Colin called you to revlew the terms of the contract and verify. Michael's calculations. After an oxtended conversation about what he'll do with his newfound wealth, you and Colin have agreed that any funds recelved could be invested to earn 7.50%, compounded monthly. Contract Evaluation Worksheet Complete the foliowing worksheet by interting the appropriste values to evaluate the contract and answer the reloted questions. Note: To ciarify possible sources of confusion and simplify your calculations: - Atsume that all bonuses are eorned in esch of the years for which they are dvallable and are paid at the end of the corresponding year(5). uniess specifically stated differentiy. Their value should be based on the salary in effect at the time the bonuses were earned. - The endersenuent proceeds are pald 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 examplo, annual interest rates should be used to discount annual cash flows, and monthly inkerest rates are used to discount monthly cash flows. Therefore, it moy be fectsiary to compute the appropriate interest rote that should be used in a discounting calculation. - Mound all dollar amountes to the nearest whole dollor and carry out all interest rate factors to four decimal placess. - When entering intermediate veluos as nhsner choices, be sure to round them to the nearest doller, howaver When using those some Folves to caitulate another answer, d0 not round. Colin Closer's Contract Evaluation Worksheet 11 Discounted Annual alary 12 13 Time-in-League Bonus 14 Oiscount factor (based on Cell B4 above) 15 Discounted Time-in-leogue Bonus:- 16 21 Performance Bonus 22 Dicount factor (bsees on Cell Bs noore) 23 Dicounted Performitice Eonus 24 W ther a nominal ac discounted bestan - ther a namanai ar discounted bas-8? Checis all that apply? 1. Given your workeheet calculobisns, which of the foliowing statements is accurate? Is Michaei's estimate of the value of Colin's contract accurate on elther oneminal of discounted bosis? Check all thot opply. Michael's estimate of the nominal value of Colin's contract is correct. It is appropriste and hecessnry to discount the performance bonus using the bank account's affective annual interest rete because of differences in the timing of the compounding of the bank accounk and that of the payments for the performance bonus. It is appropriate and necessiry 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. Related Question: The local car dealer creating Colin's endorsement opportunity can earn 674 (compounded quarterty) on his deposited funds. She would hove 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 0.4328. ]