PROBLEM #1_________(10 PTS.) Assume that you are an agent for the Seattle Mariner’s next superstar and that you are negotiating with a number of major league baseball teams concerning the superstar’s next contract. The Mariners are hopeful that the superstar will sign with them and have offered a package containing the following:- Signing Bonus at the start of Year 1: $10,000,000 -7-Year contract paying $12,000,000 per year -A lump-sum payment made at the end of 10 years of $5,000,000
The Los Angeles Dodgers have countered with an attractive package of their own which includes:-Signing Bonus at the start of Year 1: $1,000,000 -7-Year contract paying $15,000,000 per yearREQUIRED:1. Which contract is the best “financial deal?
Explain. Show Computations. Use an interest rate of 10%.
Answer: The contract of The Los Angeles Dodgers is the best financial deal.
Calculations and explanations:
To determine the best financial deal we will find the present value of both the offers. The offer with the higher present value will be better.
Present value computation of offer 1 i.e. offer by The Mariners: (all numbers rounded to the nearest whole number i.e. 0 decimals):
| Year (n) | Amount | 1+r | PVIF = 1/(1+r)^n | PV = Amount * PVIF |
| 0 | 10,000,000 | 1.10 | 1.0000 | 10,000,000 |
| 1 | 12,000,000 | 0.9091 | 10,909,091 | |
| 2 | 12,000,000 | 0.8264 | 9,917,355 | |
| 3 | 12,000,000 | 0.7513 | 9,015,778 | |
| 4 | 12,000,000 | 0.6830 | 8,196,161 | |
| 5 | 12,000,000 | 0.6209 | 7,451,056 | |
| 6 | 12,000,000 | 0.5645 | 6,773,687 | |
| 7 | 12,000,000 | 0.5132 | 6,157,897 | |
| 8 | - | 0.4665 | - | |
| 9 | - | 0.4241 | - | |
| 10 | 5,000,000 | 0.3855 | 1,927,716 | |
| Total PV | 70,348,742 |
PV of offer of The Los Angeles Dodgers :
| Year (n) | Amount | 1+r | PVIF = 1/(1+r)^n | PV = Amount * PVIF |
| 0 | 1,000,000 | 1.10 | 1.0000 | 1,000,000 |
| 1 | 15,000,000 | 0.9091 | 13,636,364 | |
| 2 | 15,000,000 | 0.8264 | 12,396,694 | |
| 3 | 15,000,000 | 0.7513 | 11,269,722 | |
| 4 | 15,000,000 | 0.6830 | 10,245,202 | |
| 5 | 15,000,000 | 0.6209 | 9,313,820 | |
| 6 | 15,000,000 | 0.5645 | 8,467,109 | |
| 7 | 15,000,000 | 0.5132 | 7,697,372 | |
| Total PV | 74,026,282 |
We can see that present value of The Los Angeles Dodgers' offer is more and hence the contract of The Los Angeles Dodgers is the best financial deal.
PROBLEM #1_________(10 PTS.) Assume that you are an agent for the Seattle Mariner’s next superstar and...
PROBLEM #1_________(10 PTS.) Assume that you are an agent for the Seattle Mariner’s next superstar and that you are negotiating with a number of major league baseball teams concerning the superstar’s next contract. The Mariners are hopeful that the superstar will sign with them and have offered a package containing the following:- Signing Bonus at the start of Year 1: $10,000,000 -7-Year contract paying $12,000,000 per year -A lump-sum payment made at the end of 10 years of $5,000,000 The...