Finance in Ation Time Value of Money As the son of a Major L

Finance in Ation- Time Value of Money As the son of a Major League Baseball (MLB) player, Henry Homerun-King has been playing baseball since he was old enough to hold a bat, and he has alway dreamed of following in his fathers footsteps. For the past four years, hes baseball team. Last year, based on his outstanding fielding and hitting record, including 122 runs batted in (RB1) and 31 home runs, he was selected to receive the Minor League Player of the Year award. been the starting center fielder for the Ketchum Baldies, a double-A (AA)-level Yesterday, in a telephone conversation with his agent, Steven Sign\'em-Now. Henry learned that he\'s being called up to the big leagues and traded to the Mobile Bayhopperst In fact, he\'s supposed to report to the coach of the Bayhoppers next Monday. To add another source of change to his world, Henry and Steven must negotiate a new contract with Elijah Stone, the general manager of the Bayhoppers Henry and Steven are having a prenegotiation conversation Steven Henry, we need to review and agree on the numbers and provisions that I\'m going to propose to Eljah later this afternoon. Henry Cooll I am so excited! I checked the league standings this moming, and the Bayhopp ers are currenty 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, theyf -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 vour input, so let\'s run down my list of thoughts, and then we can talk about your move and your transition to Mobil Henry Ok, what\'s on your list? Steven First, I\'m proposing a three-year salary equal to 15% greater than the MLB\'s minimum player salary of $414,000. This should bring your annual salary to $476,100 per year for each of the next three years, My rationae is that if you do really well during the next three years, then we can renegotiate your contract sooner and go for the really big bucks in threemrather than in four or fivemyears. Remember that you will be paid at the end of each month, and dont worry about the effect of taxes at this stage of the deal. We worry about your federal and state taxes once we meet with your financial planner So now, let\'s think about the other terms of your contract. I\'m thinking that we propose an allowance of $7,500 to pay for your expenses, to be paid when the contract is signed, a signing bonus of $1500o, and a performance bonus. Ive aiso lined up your first endorsement contract for you moving Henry Great But two quick questions. First, when would the signing bonus be paid? Second, what type of performance bonus are about? steven In the case of the signing bonus, I think, given your abity to manage money. we should ask that you receve one-thind of the bonus at the beginning of each year of your contract. l think we capitalize on your fielding and batting performance last year and ask for a 15% bonus if you are selected for consideration of a as a Gold Glove Award (for exempliany fielding), the Sliver sugger Award, or the Hank Aaron Award. Oh, and don\'t forget, you\'re also eligible for a s1o,000 time-in-league bonus it you remain on the rotr for six months. his bonus iw usually paid at the and of the first year of your contract. The last important detalil is the endorsement deal that Ive found for you. Araurant owner in maximum of eight hours per month meeting and greeting her ques on non mghts. In returm tor your peymentstand a free meal on the nights you appear-you will sign autographs and have your picture taken with commit to a one year contract. Mobilie wil Il pay you $400 per month to spend a quests As of today, the restaurant owner is only willing to

Solution

For Excel sheet please refer below with explanation in Remarks column:-

Second related question can be solved in a way that restaurent owner has to pay or put a amount in a bank or security which is giving him 8% return componded semiannually so he will put something today which will pay player upto 6 months after that he will put again the same money that will pay for rest 6 months.

i.e. we need to calculate present value so that he can pay each month for 6 months $400 to the player and earns 8% on the investment.

So first we know 8% is semiannual componded so six month rate is 8/2 = 4%

Now we need to calculate each month discount rate as below:-

= (1+ 0.04 ) ^ (1/6) - 1

This will give each month rate

= 0.656%

Now we will calculate Net present value for $400 payment for 6 months discounted with 0.656%.

I am using excel sheet for calculating Net present Value:-

Please use below formula and table in excel:-

Here i have also provided Row number and column no. for more clear understanding of formula:-

Formula:- NPV (0.00656,B4:G4)

It will give $2345.86

This value restaurent owner has to deposit now every 6 months for paying $400 each month to player.

Hope above is ok. Please let me know if further help required.

Thank You!!

	A	B	C	D	E
1	Assumption and calculated values					Remarks / Notes
2	Bank Rate Information:-
3	Henry\'s bank account rate (Comp. monthly)	5.5000%
4	Monthly Bank Rate	0.4583%				B3/12
5	Effevtive Annual Rate	5.6408%				(1+B4)^12-1
6
7	Salary and Bonus information:-	Year 1	Year 2	Year 3	Total Value
8	Annual Salary	$4,76,100.00	$4,76,100.00	$4,76,100.00	$14,28,300.00	As per the question same for each year
9	Monthly Salary	$39,675.00	$39,675.00	$39,675.00		B8/12
10	Discount Factor	11.65	11.028	10.4392		Given
11	Discount Monthly Salary	$4,62,214.42	$4,37,534.06	$4,14,171.53	$13,13,920.02	B9*B10
12
13	Moving Bonus	$7,500.00			$7,500.00	As per question, given at starting of first year
14	Discount Factor	1
15	Discount Moving Bonus	$7,500.00			$7,500.00	B13*B14
16
17	Signing Bonus	$5,000.00	$15,000.00	$15,000.00	$35,000.00	B17 is one third of 15000, and C17 & D17 are some of 10000 and one third of 15000
18	Discounted Factor	1	0.946604089	0.896059301
19	Discounted Signing Bonus	$5,000.00	$14,199.06	$13,440.89	$32,639.95	B17*B18
20
21	Time in league bonus	$10,000.00			$10,000.00	As per the question
22	Discount Factor	0.946604089
23	Discounted time in league bonus	$9,466.04			$9,466.04
24
25	Performance Bonus	$71,415.00	$71,415.00	$71,415.00	$2,14,245.00	15% of B8
26	Discount Factor	0.946604089	0.896059301	0.848213398
27	Discounted Performance Bonus	$67,601.73	$63,992.07	$60,575.16	$1,92,168.97
28
29	Endorsement Payment	$400.00			$400.00	As per the question
30	Discounted Factor	11.65
31	Discounted Endorsement Payment	$4,660.00			$4,660.00
32
33	Contracts Total Nominal Value				$16,99,845.00	Sum of cells E29*12 + Cell E25 + E21+E17+E13+E8
34	Contracts Total Discounted Value				$15,60,354.98	Sum of cells E31+E27+E23+E19+E15+E11