Flynn Fireballer 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 Ketchum Baldies; 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 18-2 winloss record, an earned run average (ERA) of 2.23, and 166 strikeouts in 147.2 innings pitched. He is also your best friend.

Two weeks ago, on his three-year anniversary with the team, Flynn received the following email from his agent, Noah Never-Enough, indicating that he is being called up to the Springfield Dusties, the Baldiess corresponding Major League Baseball (MLB) team. Moreover, Flynns contract is being revised to reflect his new status. The email describes the general terms and conditions of Flynns revised contract.

Flynn is so excited! According to Noah, the contract is worth $2,382,400assuming receipt of all possible bonuses. After rereading the email twice and calling his family, Flynn called you to review the terms of the contract and verify Noahs calculations. After an extended conversation about what hell do with his newfound wealth, you and Flynn have agreed that any funds received could be invested to earn 6.00%, compounded monthly.

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:

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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 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.

When entering intermediate values as answer choices, be sure to round them to the nearest dollar, however when using those same values to calculate another answer, do not round.

1. Given your worksheet calculations, which of the following statements is accurate? Is Noahs estimate of the value of Flynns contract accurate on either a nominal or discounted basis? Check all that apply.

-Noahs estimate of the nominal value of Flynns contract is correct.

-Noahs estimate of the value of Flynns contract is incorrect on a nominal basis, and the error is $52,513.

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It is appropriate and necessary to discount the performance bonus using the bank accounts 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.

Related Question: The local car dealer creating Flynn'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 Flynn 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.]

Flynn Fireballer's Contract Evaluation Worksheet 2 Assumptions and Calculated Values Bank Rate Information: Flynn's Bank Account Rate (compounded monthly) Monthly Bank Rate Effective Annual Interest Rate 4 5 7 Year 1 Year 2 Year 3 Year 4 Total value 8 9 Salary and Bonus Information: Annual Salary (4% COLA) Monthly Salary Discount factor (based on Cell B4 above) Discounted Annual Salary 10 11.6189 10.9439 10.3082 9.7093 11 12 13 0.9705 Time-in-League Bonus Discount factor (based on Cell B4 above) Discounted Time-in-League 15 14 0.9705 Discount factor (based on Cell B4 above) Discounted Time-in-League Bonus 15 16 17 Milestone Bonus 18 0.9419 0.8872 0.8356 0.7871 Discount factor (based on Cell B5 above) Discounted Milestone Bonus 19 20 21 22 0.9419 0.8872 0.8356 0.7871 Performance Bonus Discount factor (based on Cell B5 above) Discounted Performance Bonus 23 24 25 26 11.6189 10.9439 Monthly Endorsement Contract Payment Discount factor (based on Cell B4 above) Discounted Monthly Endorsement Payment 27 28 29 30 Contract's Total Nominal Value Contract's Total Discounted Value Flynn Fireballer's Contract Evaluation Worksheet 2 Assumptions and Calculated Values Bank Rate Information: Flynn's Bank Account Rate (compounded monthly) Monthly Bank Rate Effective Annual Interest Rate 4 5 7 Year 1 Year 2 Year 3 Year 4 Total value 8 9 Salary and Bonus Information: Annual Salary (4% COLA) Monthly Salary Discount factor (based on Cell B4 above) Discounted Annual Salary 10 11.6189 10.9439 10.3082 9.7093 11 12 13 0.9705 Time-in-League Bonus Discount factor (based on Cell B4 above) Discounted Time-in-League 15 14 0.9705 Discount factor (based on Cell B4 above) Discounted Time-in-League Bonus 15 16 17 Milestone Bonus 18 0.9419 0.8872 0.8356 0.7871 Discount factor (based on Cell B5 above) Discounted Milestone Bonus 19 20 21 22 0.9419 0.8872 0.8356 0.7871 Performance Bonus Discount factor (based on Cell B5 above) Discounted Performance Bonus 23 24 25 26 11.6189 10.9439 Monthly Endorsement Contract Payment Discount factor (based on Cell B4 above) Discounted Monthly Endorsement Payment 27 28 29 30 Contract's Total Nominal Value Contract's Total Discounted Value