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 Moab Mountain Goats; last year, he was the first runner-up for the Minor League Player of the Year award. Using his 96 mph fastball, an impeccable curveball and slider, and a reliable changeup pitch, he achieved a 16-3 win-loss record, an earned run average (ERA) of 2.98, and 146 strikeouts in 117.0 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 El Paso Grandies, the Mountain Goats's corresponding Major League Baseball (MLB) team. Moreover, Nick's contract is being revised to reflect his new status. The email describes the general terms and conditions of Nick's revised contract.
Nick, Congratulations! You've been called up to the El Paso Grandies. 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: Nick Nohitter hereafter referred to as the \"Player," is offered a four-year contract with an annual salary of $474,000 per year, to be 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-Iiving 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 $15,000 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 selected for consideration of a major awardsuch as the 15% bonus if he is selected for consideration of a major awardsuch as the Cy Young Award (for outstanding pitching). The Player is also offered the following milestone bonus: a $100,000 bonus if he ties Nolan Ryan's 1973 single-season strikeout record (383 strikeouts). I 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 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 Grandies, I've also been able to secure the following endorsement opportunity: A local car dealer has offered you a contract that will pay $800 per month for two years. This contract is contingent on your accepting the contract with the Grandies 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. A local car dealer has offered you a contract that will pay $800 per month for two years. This contract is contingent on your accepting the contract with the Grandies 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! Assumptions and 10 11 12 13 14 15 A Calculated Values Bank Rate Information: Nick's Bank Account Rate (compounded monthly) Monthly Bank Rate Effective Annual Interest Rate Salary and Bonus Information: Annual Salary (4% COLA) Monthly Salary Discount factor (based on Cell B4 above) Discounted Annual Salary Time-in-League Bonus Discount factor (based on Cell B4 above) Discounted Timein-League Bonus Year 1 Year 2 Year 3 Year 4 | $ $ 11.4653 10.5342 Total value E 16 17 18 19 20 21 22 23 24 25 25 27 28 29 30 Milestone Bonus Discount factor (based on Cell B5 above) Discounted Milestone Bonus Performance Bonus Discount factor (based on Cell BS above) Discounted Performance Bonus Monthly Endorsement Contract Payment Discount factor (based on Cell B4 above) Discounted Monthly Endorsement Payment Contract's Total Nominal Value Contract's Total Discounted Value l$ l l$ l I$ l$ l |$ 0.9188 0.8442 0.7756 0.7126 l$ l l$ I Is; l$ l I: 0.9188 0.8442 0.7756 0.7126 6F) 11.4653 10. 5342 $ $ :l E E :l 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. Marty's estimate of the value of Nick's contract is incorrect on a nominal basis, and the error is $43,088. 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 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.]
