16. Application of Time Value of Money Skills Harry Hurler has been playing baseball since he was...
Question:
16. Application of Time Value of Money Skills
Harry Hurler 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 win–loss 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, Harry received the following email from his agent, Marty Fineprint, indicating that he is being called up to the Mobile Bayhoppers, the Cowboys’s corresponding Major League Baseball (MLB) team. Moreover, Harry’s contract is being revised to reflect his new status. The email describes the general terms and conditions of Harry’s revised contract.
Harry,
Congratulations! You’ve been called up to the Mobile Bayhoppers. Below are the offered terms and conditions of your new contract. After you review them and think about the offer, call me and we’ll discuss your options. Congrats again!
Salary and Incentives:
|
In addition to the proposal offered by the Bayhoppers, I’ve 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 Bayhoppers and will take effect immediately upon signing your MLB contract. In return for these payments, you will participate in the dealer’s promotional events, such as signing autographs and allowing photographs as requested.
Harry is so excited! According to Marty, the contract is worth $2,760,400—assuming receipt of all possible bonuses. After rereading the email twice and calling his family, Harry called you to review the terms of the contract and verify Marty’s calculations. After an extended conversation about what he’ll do with his newfound wealth, you and Harry have agreed that any funds received could be invested to earn 7.00%, 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:
|