Finance in Action - Time Value of Money

I NEED HELP !!!

1. Application of Time Value of Honey Skills 5,, Aa El. 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 {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 99 mph fastball, an impeccable curve ball and sliderI and a reliable changeup pitchI he achieved a 18-2 win-loss recordI an earned run average {ERA} of 2.23. and 165 strikeouts in 14?.2 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-d'Team. indicating that he is being called up to the Wichita Wizards, the Cowboys'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. 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: - Colin Closer. hereafter refened to as the \"Player.\" is offered a four-year contract with an annual salary of $4?4.000 per year. to be paid at the end of each month in the contract term. - Under the league's collective bargaining agreementI 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 timeinleague bonus after six months of participation with an MLB team. This bonus will be paid immediately on completion of the six-month period. Colin is so excited! According to Michael, the contract is worth $3,250.400assuming 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 Michael's calculations. After an extended conversation about what he'll do with his new'found wealth, you and Colin have agreed that any funds received could be invested to earn 6.500D%. compounded monthly. - 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 payable at the end of the operating year if he is selected to play in the All-Star game. The Player is also offered the following milestone bonus: a $250,009 bonus if he ties Nolan Ryan's 19E 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 percentageI 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 WizardsI I've also been able to secure the following endorsement opportunity: A local car dealer has offered you a contract that will pay $?50 per month for two years. This contract is conngent on your accepijng the contract with the Wizards 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! Ta ke ca re, Michael Muir-41ml. Wm 1. Given your worksheet calculations, which of the following statements is accurate? Michael's estimate of the value of Colin's contract accurate on either a nominal or discounted basis? :I Michael's estimate of the nominal value of' Colin's contract is correct. :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. 2. The local car dealer creating Colin's endorsement contract can earn 6% {compounded quarterly) on her 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 BIA-328.]