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Attempts Keep the Highest no score out of $3/3$

$16.$ Application of Time Value of Money Skills

Saleem Swingman 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 Moab Mountain Goats; last year, he was the first runner$-$up for the Minor League Player of the Year award. Using his $96$ mph fastball, an impeccable curve ball and slider, and a reliable changeup pitch, he achieved a $16-3$ win$$loss record, an earned run average $($ERA$)$ of $2\mathrm{.}98,$ and $146$ strikeouts in $117\mathrm{.}0$ innings pitched. He is also your best friend.

Two weeks ago, on his three$-$year anniversary with the team, Saleem received the following email from his agent, Steven Sign$$em$-$Now, indicating that he is being called up to the Wichita Wizards, the Mountain Goats$$s corresponding Major League Baseball $($MLB$)$ team. Moreover, Saleem$$s contract is being revised to reflect his new status. The email describes the general terms and conditions of Saleem$$s revised contract.

From: Steven Sign$$em$-$Now

To: Saleem Swingman

Subject: New Team, New Contract Proposal

Saleem,

Congratulations! You$$ve been called up to the Wichita Wizards. Below are the offered terms and conditions of your new contract. After you review them and think about the offer, call me and we$$ll discuss your options. Congrats again!

Salary and Incentives:

$$ Saleem Swingman hereafter referred to as the $$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.

$$ Under the league$$s 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 Player$$s annual salary will increase at the beginning of year $2$ and year $4,$ as applicable.

$$ In addition, the Player will receive a one$-$time $$10,000$ 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.

$$ The Player is offered the following award$-$based performance incentive: a $15\%$ bonus payable at the end of the operating year if he is selected to play in the All$-$Star game. The Player is also offered the following milestone bonus: a $$100,000$ bonus if he ties Nolan Ryan$$s $1973$ single$-$season strikeout record $(383$ strikeouts$).$

$$ The Player is eligible for each potential bonus each year that the contract is in effect and, if expressed as a percentage, will be based on the value of the Player$$s 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 Wizards, I$$ve also been able to secure the following endorsement opportunity:

A local car dealer has offered you a contract that will pay $$3,000$ per month for two years. This contract is contingent on your accepting the contract with the Wizards and will take effect immediately upon signing your MLB contract. In return for these payments, you will participate in the dealer$$s promotional events, such as signing autographs and allowing photographs as requested.

I$$ve also attached a worksheet that you can use to analyze the deal. I$$m in negotiations for the rest of the day, so let$$s discuss your thoughts on the contract proposal tomorrow. I$$m proud of you!

Take care,

Steven

Steven Sign$$em$-$Now

Sports Agent, R&R Talent Management Inc. $|$ Wichita

Saleem is so excited! According to Steven, the contract is worth $$3,172,400$assuming receipt of all possible bonuses. After rereading the email twice and calling his family, Saleem called you to review the terms of the contract and verify Steven$$s calculations. After an extended conversation about what he$$ll do with his newfound wealth, you and Saleem have agreed that any funds received could be invested to earn $8\mathrm{.}50\%,$ 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.

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