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 $750 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! Gavin is so excited! According to Marty, the contract is worth $2,896,400-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 Marty'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 7.00%, 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 Assumptions and Calculated Values 2 Bank Rate Information: 3 Gavin's Bank Account Rate (compounded monthly) Monthly Bank Rate 4 5 Effective Annual Interest Rate Salary and Bonus Year 1 Year 2 Year 3 Year 4 Total value $ $ $ Information: Annual Salary (4% COLA) Monthly Salary Discount factor (based on Cell B4 above) Discounted Annual Salary 11.5571 10.7780 10.0514 9.3737 11 $ $ 12 13 Time-in-League Bonus 14 0.9657 Discount factor (based on Cell B4 above) Discounted Time-in-League 15 Bonus 16 Milestone Bonus $ 18 0.9326 0.8697 0.8111 0.7564 Discount factor (based on Cell B5 above) Discounted Milestone Bonus 19 21 Performance Bonus 08:30 0.250 0.9326 0.8697 0.11 0.8111 Discount factor (based on Cell B5 above) 0.7564 07564 23 Discounted Performance Bonus Discounted Performance Bonus is $ $ $ $ 25 $ $ Monthly Endorsement Contract Payment Discount factor (based on Cell B4 above) 11.5571 10.7780 27 Discounted Monthly Endorsement Payment 29 30 Contract's Total Nominal Value 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 Gavin's contract accurate on either a nominal or discounted basis? Check all that apply. U 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. U Marty's estimate of the value of Gavin'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 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 8.4328.] 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 $750 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! Gavin is so excited! According to Marty, the contract is worth $2,896,400-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 Marty'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 7.00%, 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 Assumptions and Calculated Values 2 Bank Rate Information: 3 Gavin's Bank Account Rate (compounded monthly) Monthly Bank Rate 4 5 Effective Annual Interest Rate Salary and Bonus Year 1 Year 2 Year 3 Year 4 Total value $ $ $ Information: Annual Salary (4% COLA) Monthly Salary Discount factor (based on Cell B4 above) Discounted Annual Salary 11.5571 10.7780 10.0514 9.3737 11 $ $ 12 13 Time-in-League Bonus 14 0.9657 Discount factor (based on Cell B4 above) Discounted Time-in-League 15 Bonus 16 Milestone Bonus $ 18 0.9326 0.8697 0.8111 0.7564 Discount factor (based on Cell B5 above) Discounted Milestone Bonus 19 21 Performance Bonus 08:30 0.250 0.9326 0.8697 0.11 0.8111 Discount factor (based on Cell B5 above) 0.7564 07564 23 Discounted Performance Bonus Discounted Performance Bonus is $ $ $ $ 25 $ $ Monthly Endorsement Contract Payment Discount factor (based on Cell B4 above) 11.5571 10.7780 27 Discounted Monthly Endorsement Payment 29 30 Contract's Total Nominal Value 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 Gavin's contract accurate on either a nominal or discounted basis? Check all that apply. U 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. U Marty's estimate of the value of Gavin'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 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 8.4328.]