Ch $05-$ Assignment $-$ Time Value of Money

$16.$ Application of Time Value of Money Skills

Nick Nohitter has been playing baseball since he was five years old anchas always dreamed of playing in the big leagues. Last season, he was starting pitcher for a double$-$A $($AA$)-$level baseball team, the Roswell Extraterrestrials; last yeat, he was the first runner$-$up for the Minor League Player of the Year award. Using his $99mph$ fastball, an impeccable curve ball and slider, and a reliable changeup pitch, an earned run average $($ERA$)$ of $2\mathrm{.}23,$ and $166$ strikeouts in $147\mathrm{.}2$ innings pitched. He is also your best friend.

Two weeks ago, on his three$-$year anniversary with the team, Nick received the following email from his agent, George Get$-$d'Bucks, indicating that he is being called up to the Springfield Dusties, the Extraterrestrials's corresponding Major League Bascball $($MLB$)$ team. Moreover, Nick's contract is being revised to reflect his new status. The email describes the general terms and conditions of Nick's revised contract.

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Nick is so excited! According to George, the contract is worth $$2,820,400$ hell do with his newfound wealth, you and Nick have agreed that any funds received could be invested to carm $5\mathrm{.}50\%,$ 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.

Remember that the timing of a cash flow affects the interest rate that is used to discount the cash flow. For example, annual interest

rates should be used to discount annual cash flows, and monthly interest rates are used to discount monthly cash flows. Therefore,

it may be necessary to compute the appropriate interest rate that should be used in a discounting calculation.

Round all dollar amounts to the nearest whole dollar and carry out all interest rate factors to four decimal places.

When entering intermediate values as answer choices, be sure to round them to the nearest dollar, however when using those same

values to calculate another answer, do not round.

Given your worksheet calculations, which of the following statements is accurate? Is George's estimate of the value of Nick's contract accurate of

either a nominal or discounted basis? Check all that appiy.

George's estimate of the nominal value of Nick's contract is correct.

It is appropriate and necessary to discount the endorsement contract using the bank account's effective annual interest rate because of differences in the timing of the compounding of the bank account and that of the payments on the endorsement contract.

George's estimate of the value of Nick's contract is incorrect on a nominal basis, and the error is $$58,088.$

Related Question: The local car dealer creating Nick's endorsement opportunity can earn $6\%($compounded quarterly$)$ on his deposited funds. Sh would have to deposit $q,$ each contract. $[$Note: The future value interest factor of $6\%$ compounded quarterly for eight quarterily periods is $8\mathrm{.}4328.$