Gavin is so excited! According to Steven, the contract is worth $$2,344,400$assuming receipt of all possible bonuses. After rereading the email twice and calling his family, Gavin called you to review the terms of the contract and verify Steven$$s calculations. After an extended conversation about what he$$ll do with his newfound wealth, you and Gavin have agreed that any funds received could be invested to earn $5\mathrm{.}00\%,$ 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:

$$ 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.

Gavin Goldenarm's Contract Evaluation Worksheet

A

B

C

D

E

F

$1$ Assumptions and Calculated Values

$2$ Bank Rate Information:

$3$ Gavin's Bank Account Rate $($compounded monthly$)$

$\%$

$4$ Monthly Bank Rate

$\%$

$5$ Effective Annual Interest Rate

$\%$

$6$

$7$ Salary and Bonus Information: Year $1$ Year $2$ Year $3$ Year $4$ Total value

$8$ Annual Salary $(4\%$ COLA$)$

$

$

$

$

$

$9$ Monthly Salary

$

$

$

$

$10$ Discount factor $($based on Cell B$4$ above$)11\mathrm{.}68122200411\mathrm{.}1126763910\mathrm{.}57180289010\mathrm{.}057254654195$

$11$ Discounted Annual Salary

$

$

$

$

$

$12$

$13$ Time$-$in$-$League Bonus

$

$

$14$ Discount factor $($based on Cell B$4$ above$)0\mathrm{.}9754$

$15$ Discounted Time$-$in$-$League Bonus

$

$

$16$

$17$ Milestone Bonus

$

$

$

$

$

$18$ Discount factor $($based on Cell B$5$ above$)0\mathrm{.}95130\mathrm{.}90500\mathrm{.}86100\mathrm{.}8191$

$19$ Discounted Milestone Bonus

$

$

$

$

$

$20$

$21$ Performance Bonus

$

$

$

$

$

$22$ Discount factor $($based on Cell B$5$ above$)0\mathrm{.}95130\mathrm{.}90500\mathrm{.}86100\mathrm{.}8191$

$23$ Discounted Performance Bonus

$

$

$

$

$

$24$

$25$ Monthly Endorsement Contract Payment

$

$

$

$26$ Discount factor $($based on Cell B$4$ above$)11\mathrm{.}681211\mathrm{.}1127$

$27$ 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.

Steven$$s estimate of the nominal value of Gavin$$s contract is correct.

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.

It is appropriate and necessary 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 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 $8\mathrm{.}4328.]$

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