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: - 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. - The endorsement proceeds are paid 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 fiow. 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. - Round all dollar amounts to the nearest whole dollar and carry out all interest rate factors to four decimal places. - When entering intermediate values as answer choices, be sure to round them to the nearest doliar, however when using those same values to calculate another answer, do not round. A B c D E F Values 2 Bank Rate Information: 3 Gavin's Banik Account Rate % (compounded monthly) Monthly Bank Rate 5 Effective Annual Interest Rate 7 Salary and Bonus Year 1 Year 2 Year 3 Total value Information: 8 Annual Salary (4\% COLA) 9 Monthly Salary 10 Discount foctor (based on Cell 11.681222004 11.11267639 10.571802890 10.057254654195 B4 above) 11 Discounted Annual Salary 3 3 1 12 13 Time-in-League Bonus 14 Discount factor (based on Cell 0.9754 B4 above) 15 Discounted Time-in-League Bonus 16 17 Milestone Bonus 18 Discount factor (based on Cell 0.9513 0.9050 0.8610 0.8191 85 above) 19 Discounted Milestone Bonus 20 21 Performance Bonus 22 Discount factor (based on Cell 0.9513 0.9050 0.8610 0.8191 BS above) 23 Discounted Performance Bonus 24 25 Monthly Endorsement Contract Payment 26 Discount factor (based on Cell 11.6812 11.1127 B4 above) 27 Discounted 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 Steven's estimate of the value of Gavin's contract accurate on either a nominal or discounted basis? Check all that apply. 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. Steven's estimate of the value of Gavin's contract is incorrect on a nominal basis, and the error is $50,389. Steven's estimate of the nominal value of Gavin's contract is correct. Related Question: The local car dealer creating Gavin'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 Gavin 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.] 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: - 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. - The endorsement proceeds are paid 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 fiow. 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. - Round all dollar amounts to the nearest whole dollar and carry out all interest rate factors to four decimal places. - When entering intermediate values as answer choices, be sure to round them to the nearest doliar, however when using those same values to calculate another answer, do not round. A B c D E F Values 2 Bank Rate Information: 3 Gavin's Banik Account Rate % (compounded monthly) Monthly Bank Rate 5 Effective Annual Interest Rate 7 Salary and Bonus Year 1 Year 2 Year 3 Total value Information: 8 Annual Salary (4\% COLA) 9 Monthly Salary 10 Discount foctor (based on Cell 11.681222004 11.11267639 10.571802890 10.057254654195 B4 above) 11 Discounted Annual Salary 3 3 1 12 13 Time-in-League Bonus 14 Discount factor (based on Cell 0.9754 B4 above) 15 Discounted Time-in-League Bonus 16 17 Milestone Bonus 18 Discount factor (based on Cell 0.9513 0.9050 0.8610 0.8191 85 above) 19 Discounted Milestone Bonus 20 21 Performance Bonus 22 Discount factor (based on Cell 0.9513 0.9050 0.8610 0.8191 BS above) 23 Discounted Performance Bonus 24 25 Monthly Endorsement Contract Payment 26 Discount factor (based on Cell 11.6812 11.1127 B4 above) 27 Discounted 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 Steven's estimate of the value of Gavin's contract accurate on either a nominal or discounted basis? Check all that apply. 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. Steven's estimate of the value of Gavin's contract is incorrect on a nominal basis, and the error is $50,389. Steven's estimate of the nominal value of Gavin's contract is correct. Related Question: The local car dealer creating Gavin'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 Gavin 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.]