An MLB player is in contract negotiations. The current contract is as follows: Year &nb
An MLB player is in contract negotiations. The current contract is as follows:
Year Salary
0 $8,000,000 (Signing Bonus)
1 $4,000,000
2 $4,800,000
3 $5,700,000
4 $6,400,000
5 $7,000,000
6 $7,500,000
Assume the payments are at the end of the year. Interest rate is 8%.
The player has asked you as his agent to negotiate the terms of a new contract:
1. He wants a contract increase of $750,000 over the previous contract.
2. He wants the new 6-year contract paid out in the following way: A $9 million signing bonus payable today and an equal salary paid every three months (quarterly) with the first paycheque three months from now.
Assuming the team agrees to his new demands, if the interest rate is 8% annually what is the amount of his quarterly payment?
Homework Answers
First, we calculate the value of the current contract. This is calculated as the present value of salary payments.
Present value of each payment = payment / (1 + interest rate)year.
Value of current contract = $34,538,319
Value of new contract = $34,538,319 + $750,000 = $35,288,319.
Signing bonus = $9,000,000.
The present value of salary payments = value of new contract - signing bonus.
The present value of salary payments = $35,288,319 - $9,000,000 = $26,288,319.
The quarterly payment is calculated using PMT function in Excel:
rate = 8%/4 (converting annual rate into quarterly rate)
nper = 6 * 4 (6 years with 4 quarterly payments each year).
pv = 26288319 (present value of salary payments)
PMT is calculated to be $1,389,892.27.
The amount of his quarterly payment is $1,389,892.27.
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