Th 05 - Assignment - Time Value of Money Fiynn Fireballer has been playing baseball since he was five years old and has always dreamed of piaying in the big leagues. Last season, he was a starting pitcher for a double-A (AA)-level baseball team, the Roswell Extraterrestrials; last yeor, he was the first runner-up for the Minor League Player of the Year award. Using his 97 mph fastball, an impeccable curve ball and slider, and a reliable changeup pitch, he achieved a 17-3 win-loss record, an earned run average (ERA) of 2.84, and 108 strikeouts in 123.1 innings pitched. He is also your best friend. Two weeks ago, on his three-year anniversary with the team, Fynn received the following email from his agent, George Get-dBucks, indicating that he is being called up to the Springfield Dusties, the Extraterrestrials's corresponding Major League Baseball (ML.B) team. Moreover, Flynn's contract is being revised to reflect his new status. The email describes the general terms and conditions of Flynn's revised contract. From: George Get-d'Bucks To: Flynn Fireballer Subject: New Team, New Contract Proposal Flynn, Conaratulationst You've been called up to the Sorinaffeld Dusties. Below are the Fiyn is so excited According to George, the contract is worth $3,634,400-assuming receipt of all possible bonuses. After rereading the emall twice and calling his family, Flynn 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 Fiynn have agreed that any funds received could be invested to earn 7.50%, compounded manthly. 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 caiculation. - Round all dollar amounts to the nearest whole dollar and carry out all Thterest 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 caiculate another answer, do not round. 20 28 29 Contract's Total Nominal Volue 30 Contract's Total Discounted Value 1. Given your worksheet calculations, which of the following statements is accurate? is George's estimate of the value of Fynn's contract accurate on ither a nominal or discounted basis? Check all that apply, George's estimate of the value of Fiynn's contract is incorrect on a nominal basis, and the error is $74.814. 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. 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. Related Question: The local car dealer creating Flynn's endorsement opportunity can eam 6% (compounded quarterly) on his deposited funds. 5 he would have to deposit. each quarter, starting exactly two years before the day Flynn signs his contract, to fund her endortement contract. [Note: The future value interest factor of 6% compounded quarterly for eight quarteriy periods is 8.4328. ] Th 05 - Assignment - Time Value of Money Fiynn Fireballer has been playing baseball since he was five years old and has always dreamed of piaying in the big leagues. Last season, he was a starting pitcher for a double-A (AA)-level baseball team, the Roswell Extraterrestrials; last yeor, he was the first runner-up for the Minor League Player of the Year award. Using his 97 mph fastball, an impeccable curve ball and slider, and a reliable changeup pitch, he achieved a 17-3 win-loss record, an earned run average (ERA) of 2.84, and 108 strikeouts in 123.1 innings pitched. He is also your best friend. Two weeks ago, on his three-year anniversary with the team, Fynn received the following email from his agent, George Get-dBucks, indicating that he is being called up to the Springfield Dusties, the Extraterrestrials's corresponding Major League Baseball (ML.B) team. Moreover, Flynn's contract is being revised to reflect his new status. The email describes the general terms and conditions of Flynn's revised contract. From: George Get-d'Bucks To: Flynn Fireballer Subject: New Team, New Contract Proposal Flynn, Conaratulationst You've been called up to the Sorinaffeld Dusties. Below are the Fiyn is so excited According to George, the contract is worth $3,634,400-assuming receipt of all possible bonuses. After rereading the emall twice and calling his family, Flynn 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 Fiynn have agreed that any funds received could be invested to earn 7.50%, compounded manthly. 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 caiculation. - Round all dollar amounts to the nearest whole dollar and carry out all Thterest 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 caiculate another answer, do not round. 20 28 29 Contract's Total Nominal Volue 30 Contract's Total Discounted Value 1. Given your worksheet calculations, which of the following statements is accurate? is George's estimate of the value of Fynn's contract accurate on ither a nominal or discounted basis? Check all that apply, George's estimate of the value of Fiynn's contract is incorrect on a nominal basis, and the error is $74.814. 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. 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. Related Question: The local car dealer creating Flynn's endorsement opportunity can eam 6% (compounded quarterly) on his deposited funds. 5 he would have to deposit. each quarter, starting exactly two years before the day Flynn signs his contract, to fund her endortement contract. [Note: The future value interest factor of 6% compounded quarterly for eight quarteriy periods is 8.4328. ]