21. When Alex Rodriguez moved to the Texas Rangers in 2001, he received a lot of

Question

21. When Alex Rodriguez moved to the Texas Rangers in 2001, he received a lot of atten. tion for his "$252 million" contract (the total of the payments promised was $252 million). He later moved to the Yankees, but assume the following in order to deter mine the value of his contract when he signed it Rodriguez earns $16 million in the first year, $17 million in years 2 through 4 $19 million in years 5 and 6, $23 million in year 7, and $27 million in years 8 through 10. He also receives his $10 million signing bonus spread equally over the first 5 years ($2 million per year). His deferred payments begin in 2011. The deferred paymen amounts total $33 million and are $5 million, then $4 million, then eight amounts of $3 million (ending in 2020). However, the actual payouts will be different. All of the deferred payments will earn 3% per year until they are paid. For example, th $5 million is deferred from 2001 to 2011, or 10 years, meaning that it will actually be $6.7196 million when paid. Assume that the $4 million payment deferred to 2012 is deferred from 2002 (each payment is deferred 10 years). The contract is a 10-year contract, but each year has a deferred component so that cash flows are paid out over a total of 20 years. The contractual payments, signing bonus, and deferred components are given below. Note that, by contract, the deferred components are not paid in the year they are earned, but instead are paid (plus inter est) 10 years later 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 S16M S17M $17M $17M $19M $19M $23M $27M $27M $27M $2M $2M $2M $2M $2M Deferred Assume that an appropriate discount rate for A-Rod to apply to the contract pay- ments is 796 per year. a. Calculate the true promised payments under this contract, including the deferred payments with interest. b. Draw a timeline of all of the payments. c. Calculate the present value of the contract. d. Compare the present value of the contract to the quoted value of $252 million. What explains the difference?

Explanation / Answer

a. true contract amount;

219+ 33*1.7 = $275.1

c. present value:

d. quoted value of the contract is $252 where as the present value is only $170.739. the difference is because of time value of money. The future inflow has incorporporated in its value the interest value for next 20 years.

year amount pvf @7% pv 2001 18 0.935 16.83 2002 19 0.873 16.587 2003 19 0.816 15.504 2004 19 0.763 14.497 2005 21 0.713 14.973 2006 19 0.666 12.654 2007 23 0.623 14.329 2008 27 0.582 15.714 2009 27 0.544 14.688 2010 27 0.508 13.716 2011 8.5 0.475 4.0375 2012 6.8 0.444 3.0192 2013 5.1 0.415 2.1165 2014 5.1 0.388 1.9788 2015 5.1 0.362 1.8462 2016 5.1 0.339 1.7289 2017 5.1 0.317 1.6167 2018 5.1 0.296 1.5096 2019 5.1 0.277 1.4127 2020 5.1 0.258 1.3158 PV of contract 170.0739

Related Questions

Navigate

• Browse (All)
• Browse 2
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.