Nick Nohitter 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 Yakima Hops; last year, he was the first runner-up for the Minor League Player of the Year award. Using his 97 mph fastball, an impeccable curve ball and slider, and a reliable changeup pitch, he achieved a 17-3 winloss record, an earned run average (ERA) of 2.84, and 108 strikeouts in 123.1 innings pitched. He is also your best friend.

Two weeks ago, on his three-year anniversary with the team, Nick received the following email from his agent, Marty Fineprint, indicating that he is being called up to the Wichita Wizards, the Hopss corresponding Major League Baseball (MLB) team. Moreover, Nicks contract is being revised to reflect his new status. The email describes the general terms and conditions of Nicks revised contract.

salary and incentives:

Nick Nohitter hereafter referred to as the Player, is offered a four-year contract with an annual salary of $534,000 per year, to be paid at the end of each month in the contract term.

Under the leagues collective bargaining agreement, 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 Players annual salary will increase at the beginning of year 2 and year 4, as applicable.

In addition, the Player will receive a one-time $10,000 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 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 if he is designated as the Most Valuable Player (MVP) in the league. The Player is also offered the following milestone bonus: a $75,000 bonus if he ties Nolan Ryans 1973 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 percentage, will be based on the value of the Players 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 Wizards, Ive also been able to secure the following endorsement opportunity:

A local car dealer has offered you a contract that will pay $2,750 per month for two years. This contract is contingent on your accepting 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 dealers promotional events, such as signing autographs and allowing photographs as requested.

Ive also attached a worksheet that you can use to analyze the deal. Im in negotiations for the rest of the day, so lets discuss your thoughts on the contract proposal tomorrow. Im proud of you!

Nick is so excited! According to Marty, the contract is worth $2,796,400assuming receipt of all possible bonuses. After rereading the email twice and calling his family, Nick called you to review the terms of the contract and verify Martys calculations. After an extended conversation about what hell do with his newfound wealth, you and Nick have agreed that any funds received could be invested to earn 7.50%, compounded monthly.

contract evaluation worksheet

D E F 1 Assumptions and Calculated Values Bank Rate Information: 2 3 Nick's Bank Account Rate % 4 (compounded monthly) Monthly Bank Rate Effective Annual Interest Rate % 5 % 6 Year 1 Year 2 Year 3 Year 4 Total value $ $ $ $ $ $ ? 7 Salary and Bonus Information: 8 Annual Salary (4% COLA) 9 Monthly Salary 10 Discount factor (based on Cell B4 above) 11 Discounted Annual Salary 12 11.5264 10.6960 9.9255 9.2105 $ $ $ 13 $ $ 14 0.9633 Time-in-League Bonus Discount factor (based on Cell B4 above) Discounted Time-in-League Bonus 15 16 17 Milestone Bonus $ $ $ $ $ 18 0.9280 0.8611 0.7991 0.7415 Discount factor (based on Cell B5 above) 19 Discounted Milestone Bonus $ s 20 21 Performance Bonus $ $ $ 22 Discount factor (based on Cell B5 0.9280 0.8611 0.7991 0.7415 Ch 05: Assignment - Time Value of Money Duve) 23 Discounted Performance Bonus $ $ $ $ $ 24 $ $ 11.5264 10.6960 25 Monthly Endorsement Contract Payment 26 Discount factor (based on Cell 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 Marty's estimate of the value of Nick's contract accurate on either a nominal or discounted basis? Check all that apply. 0 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. Marty's estimate of the value of Nick's contract is incorrect on a nominal basis, and the error is $69,239. 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. Related Question: The local car dealer creating Nick'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 Nick 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.] D E F 1 Assumptions and Calculated Values Bank Rate Information: 2 3 Nick's Bank Account Rate % 4 (compounded monthly) Monthly Bank Rate Effective Annual Interest Rate % 5 % 6 Year 1 Year 2 Year 3 Year 4 Total value $ $ $ $ $ $ ? 7 Salary and Bonus Information: 8 Annual Salary (4% COLA) 9 Monthly Salary 10 Discount factor (based on Cell B4 above) 11 Discounted Annual Salary 12 11.5264 10.6960 9.9255 9.2105 $ $ $ 13 $ $ 14 0.9633 Time-in-League Bonus Discount factor (based on Cell B4 above) Discounted Time-in-League Bonus 15 16 17 Milestone Bonus $ $ $ $ $ 18 0.9280 0.8611 0.7991 0.7415 Discount factor (based on Cell B5 above) 19 Discounted Milestone Bonus $ s 20 21 Performance Bonus $ $ $ 22 Discount factor (based on Cell B5 0.9280 0.8611 0.7991 0.7415 Ch 05: Assignment - Time Value of Money Duve) 23 Discounted Performance Bonus $ $ $ $ $ 24 $ $ 11.5264 10.6960 25 Monthly Endorsement Contract Payment 26 Discount factor (based on Cell 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 Marty's estimate of the value of Nick's contract accurate on either a nominal or discounted basis? Check all that apply. 0 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. Marty's estimate of the value of Nick's contract is incorrect on a nominal basis, and the error is $69,239. 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. Related Question: The local car dealer creating Nick'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 Nick 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.]