Question

When Alex Roanguez moved to the Texas Rangers In 2001, ne received a lat of attentioN tor his "$252 million" contract (the total of the payments promised was $252 million). He later moved to the Yankees, assume the following in order signed it of his contrac determine the va Rodriguez earns $16 million in the first year, $17 million in years 2 through 4, $19 million in years 5 and 6, $23 million bonus spread equally over the first 5 years (S2 million per year). His deferred payments begin in 2011. The deferred pay- ment amounts total $33 million and are $5 million, then $4 million, then eight amounts of $3 million (ending in 2020). However, the actual payouts will be different. All 10 years, meaning that it will actually be $6 year 7, and $27 million in years 8 through 10. He also receives his $10 million signing r'ine deferred payments will earn 3% per year untl they are paid. For example, the $5 million is deferred from 2001 to 2011, or the $4 million payment deferred to eferred 10 years) when paid. Assume deferred fr (each payment The contract is a 10-year contract, but each year has a deferred component so that cash flows are paid out over a total of 20 years. The contractual payments, signing bonus, and deferred components are given below. Note that, by contract, the defemred components are not paid in the year they are eamed, but instead are paid (plus interest) 10 years later. 2003 2004 2001 2002 2005 2006 2007 2008 2009 2010 $16 M $19 M S17 M $23 M $17 M S17 M $19 M $2 M $27 M $27 M $27 M $2 M $2 M $2 M $2 M

Answer 1

All figures in $ Mill ion Contract Signing Deferred Present Total Total Pay PVF(7%) Value Year Pay Bonus Pay Interest 16.8228 2001 16 2 0 18 18 0.9346 2002 17 2 0 19 19 0.8735 16.5965 2 2003 17 0 19 0 19 0.8164 15.5116 14.4970 2004 17 2 0 19 19 0.763 2005 19 2 0 21 21 0.7131 14.9751 12.6616 2006 19 0 0 19 19 0.6664 2007 23 0 0 23 23 0.6228 14.3244 2008 27 0 27 27 0.5821 15.7167 14.6880 2009 27 0 0 27 27 0.544 0 0.5084 2010 27 C 27 27 13.7268 2011 0 5 1.7196 6.7196 0.4751 3.1925 4 2012 0 0 1.3757 5.3757 0.444 2.3868 4.0317 2013 0 3 1.0317 0.415 1.6732 2014 0 0 3 1.0317 4.0317 0.3879 1.5639 2015 C 0 3 1.0317 4.0317 0.3625 14615 2016 0 3 3 1.0317 4.0317 0.3388 1.3660 4.0317 2017 3 1.0317 0.3166 1.2765 4.0317 2018 1.0317 0.2959 1.1930 4.0317 2019 3 3 1.0317 0.2765 1.1148 3 1,0418 2020 3 1.0317 4.0317 0.2584 165.7904 Total Contract 252 O O C O

Note - 1

To calculate interest on deferred payments = For example for Year 2015(deferred from 2005 = 10 years)

=3(1+3%)¹⁰ -3 = 3(1.03)¹⁰-3 = 1.0317

Note - 2

To calculate Present Value Factor = 1/(1+rate)ⁿ

For example for Year 2001 =1/(1+0.07)¹ =0.9346

For example for Year 2015 =1/(1+0.07)¹⁵ =0.3625

Answers:

A)

18 million 19 million 19 million 19 million 21 million 19 million 23 million 27 million 27 million 27 million 6.7196 million 5.3757 million 4.0317 million Year 1 Year 2 $ Year 3 Year 4 $ Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11 Year 12 Year 13-20

B)

D. Year 2 34 5 6 7 8 10 11 12 13 20 Cash Flows $18 $19 $19 $19 $21 $19 $23 $27 $27 $27 $6.72 $5.38 $4.03 $4.03

C) Present Value of the contract = $165.7904 million

D) Option B. Because neither the interest on deferred payment was calculated nor the discounting is been done.