1. Application of Time Value of Money Skills Aa Aa As the son of a Major League
ID: 2616741 • Letter: 1
Question
1. Application of Time Value of Money Skills Aa Aa As the son of a Major League Baseball (MLB) player, Issac Itsouttahere has been playing baseball since he was old enough to hold a bat, and he has always dreamed of following in his father's footsteps. For the past four years, he's been the starting center fielder for the Roswell Extraterrestrials, a double-A (AA)-level baseball team. Last year, based on his outstanding fielding and hitting record, including 122 runs batted in (RBI) and 31 home runs, he was selected to receive the Minor League Player of the Year award. Yesterday, in a telephone conversation with his agent, Steven Sign'em-Now, Issac learned that he's being called up to the big leagues and traded to the Boston Back Bay Boys! In fact, he's supposed to report to the coach of the Back Bay Boys next Monday. To add another source of change to his world, Issac and Steven must negotiate a new contract with Micah Jeffries, the general manager of the Back Bay Boys Issac and Steven are having a prenegotiation conversation Steven Issac, we need to review and agree on the numbers and provisions that I'm going to propose to Micah later this afternoon. Issac Cool! I am so excited! I checked the league standings this morning, and the Back Bay Boys are currently in second place in the league. My dad said that they are on fire so far this season, and if they can continue their current level of performance, they-no, I mean we-could qualify for the playoffs by mid-September. Wouldn't that be incredible? Steven Yeah, kid, it would. But let's focus on today's contract negotiations. I want your input, so let's run down my list of thoughts, and then we can talk about your move and your transition to Boston Issac Ok, what's on your list?Explanation / Answer
Issac Itsouttahere's contract Evaluation Worksheet Assumptions and Calculated Values Bank Rate Information: Issac's Bank Account Rate(compunded monthly) 6% Monthly Bank Rate 0.50% Effective Interest Rate 6.17% Salary and Bonus Information : Year 1 Year 2 Year 3 Total Value Annual Salary $476100 $476100 $476100 1428300 Monthly Salary 39675 39675 39675 Discount Factor(Based on Cell C22) 11.6189 10.9439 10.3081 Discounted Monthly Salary 460980 434199 408974 1304153 Moving Bonus 7500 7500 Discount factor (based on Cell C22 above) 1 Discounted moving bonus 7500 7500 Signing Bonus 15000 15000 15000 45000 Discount Factor (based on cell C23 above) 1 0.9419 0.8872 Discounted signing bonus 15000 14129 13308 42437 Time-in-League Bonus 10000 10000 Discount Factor (based on cell C23 above) 0.9419 Discounted Time-in-league Bonus 9419 9419 Performance Bonus 71415 71415 71415 214245 Discount Factor (based on cell C23 above) 0.9419 0.8872 0.8356 Discounted performance bonus 67265.7885 63359.388 59674.374 190300 Monthly Endorsement Contract Payment 500 6000 Discount factor (based on cell C22 above) 11.6189 Discounted Monthly Endorsement Payment 5809.45 5809 Contract's Total Nominal Value 1711045 Contract's Total Discounted Value 1559617 Effective Interest rate =(1 + 0.06/12)^12 - 1 6.17% The restaurant owner creating Issac's endorsement opportunity can earn 8%(compounded semiannually) on his deposited funds. Therefore, he would have to deposit 1470.59 every six months, starting on the day Issac signs his contract, to fund its endorsement contract. (The future value interest factor of 8% compounded semi-annually for one year is 2.0400) 2941.17647 FV = Principal*int 6000 = Principal*2.0400 2941.176471 1470.588235
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