the rest plase.

12. Application of Time Value of Money Skills

Colin Closer has been playing baseball since he was five years old and has always dreamed of playing in the big leagues. Last season, he was a starting pitcher for a double-A (AA)-level baseball team, the Dodge City Cowboys; last year, he was the first runner-up for the Minor League Player of the Year award. Using his 93 mph fastball, an impeccable curve ball and slider, and a reliable changeup pitch, he achieved a 15-2 winloss record, an earned run average (ERA) of 2.76, and 123 strikeouts in 99.1 innings pitched. He is also your best friend.

Two weeks ago, on his three-year anniversary with the team, Colin received the following email from his agent, Michael Make-dTeam, indicating that he is being called up to the Springfield Dusties, the Cowboyss corresponding Major League Baseball (MLB) team. Moreover, Colins contract is being revised to reflect his new status. The email describes the general terms and conditions of Colins revised contract.

From: Michael Make-dTeam

To: Colin Closer

Subject: New Team, New Contract Proposal

Colin,

Congratulations! Youve been called up to the Springfield Dusties. Below are the offered terms and conditions of your new contract. After you review them and think about the offer, call me and well discuss your options. Congrats again!

Salary and Incentives:

Colin Closer 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 $20,000 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 selected for consideration of a major awardsuch as the Cy Young Award (for outstanding pitching). The Player is also offered the following milestone bonus: a $75,000 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 Dusties, Ive also been able to secure the following endorsement opportunity:

A local car dealer has offered you a contract that will pay $2,750 per month for two years. This contract is contingent on your accepting the contract with the Dusties and will take effect immediately upon signing your MLB contract. In return for these payments, you will participate in the dealers promotional events, such as signing autographs and allowing photographs as requested.

Ive also attached a worksheet that you can use to analyze the deal. Im in negotiations for the rest of the day, so lets discuss your thoughts on the contract proposal tomorrow. Im proud of you!

Take care,

Michael

Michael Make-dTeam

Sports Agent, R&R Talent Management Inc. | Springfield

Colin is so excited! According to Michael, the contract is worth $3,112,400assuming receipt of all possible bonuses. After rereading the email twice and calling his family, Colin called you to review the terms of the contract and verify Michaels calculations. After an extended conversation about what hell do with his newfound wealth, you and Colin have agreed that any funds received could be invested to earn 9.00%, 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.

Colin Closer's Contract Evaluation Worksheet

A B C D E F

1 Assumptions and Calculated Values

2 Bank Rate Information:

3 Colin'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) 11.4349 10.4542 9.5577 8.7380

11 Discounted Annual Salary

12

13 Time-in-League Bonus

14 Discount factor (based on Cell B4 above) 0.9562

15 Discounted Time-in-League Bonus

16

17 Milestone Bonus

18 Discount factor (based on Cell B5 above) 0.9142 0.8358 0.7641 0.6986

19 Discounted Milestone Bonus

20

21 Performance Bonus

22 Discount factor (based on Cell B5 above) 0.9142 0.8358 0.7641 0.6986

23 Discounted Performance Bonus

24

25 Monthly Endorsement Contract Payment

26 Discount factor (based on Cell B4 above) 11.4349 10.4542

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 Michaels estimate of the value of Colins contract accurate on either a nominal or discounted basis? Check all that apply.

Michaels estimate of the value of Colins contract is incorrect on a nominal basis, and the error is $50,389.

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.

Michaels estimate of the nominal value of Colins contract is correct.

Related Question: The local car dealer creating Colin'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 Colin 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.]

Searc ment - Time Value of Money oud Annual Scary Det (based on C 14 0.9562 15 Decounted Time-League Bonus 17 Milestone Bonus Dont factor (based on Cells 0.9142 0.8358 0.7641 0.6986 19 Discounted stone Bonus 0,9142 0.8358 0.7641 0.6086 21 Performance Bonus Discount factor (based on Cells bowy 2) Discounted Performance tonus 11.4349 10.4542 25 Monthly incorsement Contract Payment Discount factor (based on all above) Discounted Monty Endorsement Payment Contract's Total Nominar Value Contract's Total Discounted Value 30 Searc ment - Time Value of Money oud Annual Scary Det (based on C 14 0.9562 15 Decounted Time-League Bonus 17 Milestone Bonus Dont factor (based on Cells 0.9142 0.8358 0.7641 0.6986 19 Discounted stone Bonus 0,9142 0.8358 0.7641 0.6086 21 Performance Bonus Discount factor (based on Cells bowy 2) Discounted Performance tonus 11.4349 10.4542 25 Monthly incorsement Contract Payment Discount factor (based on all above) Discounted Monty Endorsement Payment Contract's Total Nominar Value Contract's Total Discounted Value 30