Finance in Action-Time Value of Money 1.Application of time value of money skills!!!! I need help!!!!!
Attempts: a, 1. Application of Time Value of Money Skills Aa Aa .3 Average: {37 E1 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 slider. and a reliable changeup pitch. he achieved a 182 win-loss record. an earned run average {ERA} of 2.23. and 166 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 Maked'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 reect his new status. The email describes the general terms and conditions of Colin's revised contract. From: To: Subject: Colin , 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 fouryear contract with an annual salary of $4?4.DOO per year. to be Michael Makad'Team Colin Closer New Team, New Contract Proposal Colin is so excited! According to Michael, the contract is worth $3,260,4vassuming 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. Alter 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.EUOD%. compounded monthly. 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 odier 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 performancebased bonusI 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 $250,000 bonus if he ties Nolan Ryan's 19E singleseason strikeout record {383 strikeouts}. . The Player is eligible for each potential bonus each year that the oontract is in effect and. if expressed as a peroentageI will be based on the value of the Player's base annual salary for the oorresponding year. If earned, the performanoe and milestone bonuses will be distributed in a single payment at the beginning of the next oontract year. Although this proposal describes only one milestone. the actual oontract oontains several progressive milestones. Exceeding one milestone creates the opportunity to exceed another. In addition to the proposal offered by the Wizards. I've also been able to secure the following endorsement opportunity: A local car dealer has offered you a oontract that will pay $?50 per month for two years. This oontract is oontingent on your accepting the contract with the Wizards and will take effect immediately upon signing your MLB oontract. In return for these payments. you will A local car dealer nas onereo you a contract tnat will pay srsu per montn ror two years. Inls contract Is oonongent on your accepong 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 Michaei Make-d Team Sports Agent, RR Taient Management Inc. | Wichita - 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 specically 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 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. - Round all dollar amounts to the nearest whole dollar and carry out all interest rate factors to four decimal places. Colin Closer's Contract Evaluation Worksheet A B C D E F Assumptions and Calulated Values Bank Rate Information: Colin's Bank Account Rate {compounded monthly) 6.500094: Monthly Bank Rate 0.541291: Effective Interest Rate m Salary and Bonus Information: Year 1 Total value Annual Salary {4% COLA adjustment} $4?4,000 $492,960 I $492,950 $512,505 I $1,922,596 Monthly Salary 41,030 Discount factor {based on Cell 34 above) 11.53?9 10.8605 10.1233 9.5393 Discounted Monthly Salary 452,222 446,149 413,145 402,569 $1,229,535 Time-in-League Bonus Discount factor {based on Cell 34 above) LOm"milUlliJ'I-l-'c-LIJI'JIL H D H H H I'd Discounted Time-inLeague Bonus $ 19,362 Milestone Bonus $250,000 $250,000 $250,000 $250,000 $ 1,000,000 Discount factor {based on Cell 35 above) Discounted Milestone Bonus 234,300 192,900 $352,625 Performance Bonus $21,100 $26,902 $295,390 Discount factor {based on Cell B5 above) 0.9322 . 0.??16 Discounted Performance Bonus $251,303 25 Monthly Endorsement Contract Payment Discount factor {based on Cell 34 above) 2? Discounted Monthly Endorsement Payment 3,691 28 29 Contract's Total Nominal Value $3,289,936 30 Contract's Total Discounted Value $2,853,325 1. Given your worksheet calculations, which of the following statements is accurate? Michael's estimate of the value of IColin's contract accurate on either a nominal or discounted basis? I: l: I: Michael's estimate of the nominal value of Colin's contract is correct. 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. 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 IColin signs his contract. to fund her endorsement contract. [Nata The future value interest factor of 6% compounded quarterly for eight quarterly periods is 84328.]
