Part 1

In his senior year at Mizzou, Shawn Carter had been the second runner-up for the fabled Heisman Trophy. The trophy goes to the outstanding football player in America and is presented annually by the New York Athletic Club. During the past football season, Carter had run for over 1,500 yards and scored 18 touchdowns. He had also caught 41 passes coming out of the backfield. His time in running the 40-yard dash, which professional scouts consider to be extremely important, was 4.38 seconds. He was voted first-team All American by the Associated Press and was a second-team All American in the Coaches Poll selections.

On Monday morning, his agent, Carey Jackson, called to say that she was looking at three different proposals that a major West Coast NFL professional football team had made for Shawn's services. The team had drafted him in the first round of the NFL draft as the sixth player selected out of the thousands of college football players that were eligible for that year.

The Edmonton, Alberta, team of the Canadian Football League was also interested in Shawn's services. The Canadian team had called his agent over the weekend to put its offer on the table. While the NFL team that had drafted Shawn in the first round had exclusive rights over all other U.S. teams to signing Shawn during the current year, the Canadian team was not bound by such an arrangement and could make any offer it wished and hope the outcome would be positive.

The West Coast NFL team offered the following three proposals. The teams general manager, who was in charge of contract negotiations, said his team would stand behind any of the three offers and it was up to Shawn and his agent to choose which they preferred.

Contract offer 1:

• $800,000 immediate signing bonus.
• $975,000 at the end of each year for the next five years.

Contract offer 2:

• $300,000 immediate signing bonus.
• $175,000 at the end of each year for the next four years.
• $250,000 a year at the end of years 5 through 10.
• $500,000 a year at the end of years 11 through year 35.

Contract offer 3:

• $400,000 immediate signing bonus.
• $750,000 at the end of year 1.
• $1,200,000 at the end of year 2.
• $1,500,000 at the end of year 3.
• $1,750,000 at the end of year 4.

As part of the third offer, he was also promised a $200,000 bonus at the end of any year in which he was selected to play in the Pro Bowl All-Star game. His agent figured there was a 30 percent probability of that occurring in each of the next four years.

The Edmonton, Alberta, team of the Canadian Football League offered the following:

• $500,000 signing bonus.
• $2,250,000 at the end of each year for the next four years.

The Canadian contract was not guaranteed. This means that Shawn was assured of his signing bonus, but if he did not make the team in any of the three years, he would not receive his salary. His agent figured there was an 80 percent probability that his contract would be picked up (paid) in each of the next four years. (The U.S. team's contract proposals were all guaranteed.)

As a non-business major, Shawn was confused about the process for determining the actual numerical value of the offerings. His agent began to explain to Shawn the importance of the time value of money. She said inflows in the future were not worth nearly as much as current inflows and that, therefore, they should be discounted back to the present at 7 percent interest rate. While Shawn did not fully understand how the calculations were done, he knew he could rely on his agent to do the proper analysis.

Shawn's agent has hired you to compare and contrast these four offers. Please use your Time Value of Money skills to:

First, break down each offer into todays dollars.

Then, rank the offers in the order that you think is most (1) to least (4) favorable to Shawn.

Finally, Justify your rankings, making sure to include any factors you considered in addition to the present value of each offer.

Communicate your recommendation and the basis for that recommendation to your client.