Salary and Incentives:

	Gavin Goldenarm hereafter referred to as the Player, is offered a four-year contract with an annual salary of $594,000 per year, to be paid at the end of each month in the contract term.
	Under the leagues 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 Players 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 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 $125,000 bonus if he ties Nolan Ryans 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 Players 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 Bayhoppers, Ive 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.

Gavin is so excited! According to Steven, the contract is worth $3,292,400assuming 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 Stevens calculations. After an extended conversation about what hell do with his newfound wealth, you and Gavin have agreed that any funds received could be invested to earn 5.50%, compounded monthly.

Gavin Goldenarm's Contract Evaluation Worksheet

	A	B	C	D	E	F
1	Assumptions and Calculated Values
2	Bank Rate Information:
3	Gavin's Bank Account Rate (compounded monthly)	%?
4	Monthly Bank Rate	%?
5	Effective Annual Interest Rate	%?
6
7	Salary and Bonus Information:	Year 1	Year 2	Year 3	Year 4	Total value
8	Annual Salary (4% COLA)	?	?	?	?	?
9	Monthly Salary	?	?	?	?
10	Discount factor (based on Cell B4 above)	11.6500	11.0280	10.4391	9.8817
11	Discounted Annual Salary	?	?	?	?	?
12
13	Time-in-League Bonus	?				?
14	Discount factor (based on Cell B4 above)	0.9729
15	Discounted Time-in-League Bonus	?				?
16
17	Milestone Bonus	?	?	?	?	?
18	Discount factor (based on Cell B5 above)	0.9466	0.8961	0.8482	0.8029
19	Discounted Milestone Bonus	?	?	?	?	?
20
21	Performance Bonus
22	Discount factor (based on Cell B5 above)	0.9466	0.8961	0.8482	0.8029
23	Discounted Performance Bonus	?	?	?	?	?
24
25	Monthly Endorsement Contract Payment	?	?			?
26	Discount factor (based on Cell B4 above)	11.6500	11.0280
27	Discounted Monthly Endorsement Payment	?	?			?
28
29	Contracts Total Nominal Value					?
30	Contracts Total Discounted Value					?

1. Given your worksheet calculations, which of the following statements is accurate? Is Stevens estimate of the value of Gavins contract accurate on either a nominal or discounted basis? Check all that apply.

Stevens estimate of the value of Gavins contract is incorrect on a nominal basis, and the error is $65,389.

Stevens estimate of the nominal value of Gavins contract is correct.

It is appropriate and necessary to discount the performance bonus using the bank accounts 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.]