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 93 mph fastball, an impeccable curve ball and slider, and a reliable changeup pitch, he achieved a 15-2 winloss record, an earned run average (ERA) of 2.76, and 123 strikeouts in 99.1 innings pitched. He is also your best friend.

Salary and Incentives: Nick Nohitter hereafter referred to as the "Player," is offered a four-year contract with an annual salary of $444,000 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-living 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 $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 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 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 $100,000 bonus if he ties Nolan Ryan's 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 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. A local car dealer has offered you a contract that will pay $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 dealer's promotional events, such as signing autographs and allowing photographs as requested. Nick is so excited! According to George, the contract is worth $2,522,400-assuming 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 George's calculations. After an extended conversation about what he'll do with his newfound wealth, you and Nick have agreed that any funds received could be invested to earn 7.00%, compounded monthly. A B D E F 1 2 3 3 7.00 % Assumptions and Calculated Values Bank Rate Information: Nick's Bank Account Rate (compounded monthly) Monthly Bank Rate Effective Annual Interest Rate 4 % 5 % 6 Year 1 Year 2 Year 3 Year 4 Total value 8 $ $ 11.5571 10.7780 10.0514 9.3737 7 Salary and Bonus Information: Annual Salary (4% COLA) 9 Monthly Salary 10 Discount factor (based on Cell B4 above) 11 Discounted Annual Salary 12 13 Time-in-League Bonus 14 Discount factor (based on Cell B4 above) 15 Discounted Time-in-League 11 0.9657 $ Bonus 16 17 0.9326 0.8697 0.8111 0.7564 Milestone Bonus 18 Discount factor (based on Cell B5 above) 19 Discounted Milestone Bonus 20 21 Performance Bonus Discount factor (based on Cell B5 above) 23 Discounted Performance Bonus E 22 0.9326 0.8697 0.8111 0.7564 $ 24 25 11.5571 10.7780 Monthly Endorsement Contract Payment 26 Discount factor (based on Cell B4 above) 27 Discounted Monthly Endorsement Payment 28 29 Contract's Total Nominal Value Contract's Total Discounted 30 $ Value 1. Given your worksheet calculations, which of the following statements is accurate? Is George's estimate of the value of Nick's contract accurate on either a nominal or discounted basis? Check all that apply. George's estimate of the nominal value of Nick's contract is correct. 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. George's estimate of the value of Nick's contract is incorrect on a nominal basis, and the error is $22,513. 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.] Salary and Incentives: Nick Nohitter hereafter referred to as the "Player," is offered a four-year contract with an annual salary of $444,000 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-living 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 $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 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 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 $100,000 bonus if he ties Nolan Ryan's 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 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. A local car dealer has offered you a contract that will pay $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 dealer's promotional events, such as signing autographs and allowing photographs as requested. Nick is so excited! According to George, the contract is worth $2,522,400-assuming 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 George's calculations. After an extended conversation about what he'll do with his newfound wealth, you and Nick have agreed that any funds received could be invested to earn 7.00%, compounded monthly. A B D E F 1 2 3 3 7.00 % Assumptions and Calculated Values Bank Rate Information: Nick's Bank Account Rate (compounded monthly) Monthly Bank Rate Effective Annual Interest Rate 4 % 5 % 6 Year 1 Year 2 Year 3 Year 4 Total value 8 $ $ 11.5571 10.7780 10.0514 9.3737 7 Salary and Bonus Information: Annual Salary (4% COLA) 9 Monthly Salary 10 Discount factor (based on Cell B4 above) 11 Discounted Annual Salary 12 13 Time-in-League Bonus 14 Discount factor (based on Cell B4 above) 15 Discounted Time-in-League 11 0.9657 $ Bonus 16 17 0.9326 0.8697 0.8111 0.7564 Milestone Bonus 18 Discount factor (based on Cell B5 above) 19 Discounted Milestone Bonus 20 21 Performance Bonus Discount factor (based on Cell B5 above) 23 Discounted Performance Bonus E 22 0.9326 0.8697 0.8111 0.7564 $ 24 25 11.5571 10.7780 Monthly Endorsement Contract Payment 26 Discount factor (based on Cell B4 above) 27 Discounted Monthly Endorsement Payment 28 29 Contract's Total Nominal Value Contract's Total Discounted 30 $ Value 1. Given your worksheet calculations, which of the following statements is accurate? Is George's estimate of the value of Nick's contract accurate on either a nominal or discounted basis? Check all that apply. George's estimate of the nominal value of Nick's contract is correct. 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. George's estimate of the value of Nick's contract is incorrect on a nominal basis, and the error is $22,513. 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.]