Question: Because of a salary cap NBA teams are not allowed

Because of a salary cap, NBA teams are not allowed to exceed a certain annual limit in total player salaries. Suppose the Minnesota Timberwolves had scheduled salaries exactly equal to their cap of $90 million for 2012. Kim Jenner, a star player, was scheduled to receive $15 million in 2012. To free up money to pay a prize rookie, Jenner agreed on July 1, 2012, to defer $8 million of his salary for 2 years, by which time the salary cap will have been increased. His contract called for salary payments of $15 million in 2012, $19 million in 2013, and $21 million in 2014, all on July 1 of the respective year. Now, he will receive $7 million in 2012, still $19 million in 2013, and $29 million in 2014. Jenner’s required rate of return is 10%.
Did the deferral of salary cost Jenner anything? If so, how much? Compute the PV of the sacrifice as of July 1, 2012. Explain.

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  • CreatedNovember 19, 2014
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