Salary and Incentives: Gavin Goldenarm 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 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 $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 designated as the Most Valuable Player (MVP) in the league. The Player is also offered the following milestone bonus: a $125,000 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. B D E F 1 2 3 Assumptions and Calculated Values Bank Rate Information: Gavin'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 s $ 11.4653 10.5342 9.6787 8.8926 $ 0.9585 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 13 Time-in-League Bonus 14 Discount factor (based on Cell B4 above) 15 Discounted Time-in-League Bonus 16 17 Milestone Bonus 18 Discount factor (based on Cell B5 above) 19 Discounted Milestone Bonus 20 21 Performance Bonus 22 Discount factor (based on Cell B5 above) 23 Discounted Performance $ $ $ 0.9188 0.8442 0.7756 0.7126 s $ 0.9188 0.8442 0.7756 0.7126 Bonus 24 25 26 11.4653 10.5342 Monthly Endorsement Contract Payment Discount factor (based on Cell B4 above) Discounted Monthly Endorsement Payment 27 S 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 Steven's estimate of the value of Gavin's contract accurate on either a nominal or discounted basis? Check all that apply. Steven's estimate of the value of Gavin's contract is incorrect on a nominal basis, and the error is $54,239. Steven's estimate of the nominal value of Gavin's contract is correct. 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.] Salary and Incentives: Gavin Goldenarm 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 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 $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 designated as the Most Valuable Player (MVP) in the league. The Player is also offered the following milestone bonus: a $125,000 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. B D E F 1 2 3 Assumptions and Calculated Values Bank Rate Information: Gavin'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 s $ 11.4653 10.5342 9.6787 8.8926 $ 0.9585 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 13 Time-in-League Bonus 14 Discount factor (based on Cell B4 above) 15 Discounted Time-in-League Bonus 16 17 Milestone Bonus 18 Discount factor (based on Cell B5 above) 19 Discounted Milestone Bonus 20 21 Performance Bonus 22 Discount factor (based on Cell B5 above) 23 Discounted Performance $ $ $ 0.9188 0.8442 0.7756 0.7126 s $ 0.9188 0.8442 0.7756 0.7126 Bonus 24 25 26 11.4653 10.5342 Monthly Endorsement Contract Payment Discount factor (based on Cell B4 above) Discounted Monthly Endorsement Payment 27 S 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 Steven's estimate of the value of Gavin's contract accurate on either a nominal or discounted basis? Check all that apply. Steven's estimate of the value of Gavin's contract is incorrect on a nominal basis, and the error is $54,239. Steven's estimate of the nominal value of Gavin's contract is correct. 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.]