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Alina [70]
2 years ago
5

A baseball player is offered a 5-year contract that pays him the following amounts: Year 1: $1.40 million Year 2: $1.51 million

Year 3: $2.25 million Year 4: $2.59 million Year 5: $3.17 million Under the terms of the agreement all payments are made at the end of each year. Instead of accepting the contract, the baseball player asks his agent to negotiate a contract that has a present value of $1.54 million more than that which has been offered. Moreover, the player wants to receive his payments in the form of a 5-year ANNUITY DUE. All cash flows are discounted at 10.00 percent. If the team were to agree to the player's terms, what would be the player's annual salary (in millions of dollars)
Business
1 answer:
jolli1 [7]2 years ago
8 0

The player's annual salary (in millions of dollars), using the present value calculations, is <u>$1.89743 million</u>.

<h3>What is the present value?</h3>

The present value of the player's future cash flows (salaries) is the current value or the value in today's dollars.  It is computed by discounting the future values at the appropriate discount rate.

The present value can be computed using the Present Value formula, an online finance calculator, or the PV factor table.

Formula

PV = FV \frac{1}{(1+r)^{n}}

Where:

PV = present value

FV = future value

r = rate of return

{n} = number of periods

<h3>Data and Calculations:</h3>

Discount rate = 10%

Period of salary = 5 years

Period      Cash Flows     PV Factor      Present Value

Year 1:    $1.40 million        0.909           $1,272,600 ($1.4 x 0.909)

Year 2:    $1.51 million        0.826             1,247,260 ($1.51 x 0.826)

Year 3:  $2.25 million         0.751             1,689,750 ($2.25 x 0.751)

Year 4:  $2.59 million        0.683             1,768,970 ($2.59 x 0.683)

Year 5:   $3.17 million        0.621              1,968,570 ($3.17 x 0.621)

Additional present value required          1,540,000

Total present value =                             $9,287,150

Annual salary (in millions of dollars) = $1.89743 million ($9,287,150/5).

Thus, the player's annual salary (in millions of dollars) is <u>$1.89743 million</u>.

Learn more about present value calculations at brainly.com/question/20813161

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Statement of Cash Flows for the year ended December 31, Current Year

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Operating activities:

Net income                          $11,900

Add non-cash expenses:

Depreciation                          5,400

Adjusted operating            $17,300

Changes in working capital:

Accounts receivable            -3,800

Merchandise inventory       -3,700

Accounts payable               +8,800

Accrued wages expense       -400

Net operating cash flow   $18,200

Investing activities:

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Financing activities:

Note payable, long-term    -6,300

Common stock and

additional paid-in capital +16,700

Net cash from financing  $10,400

Net cash flows                   $7,900

Explanation:

a) Data and Calculations:

Comparative balance sheets and income statement

                                                   Current Year     Prior Year    Change

Balance sheet at December 31

Cash                                                  $37,300       $29,400       +7,900

Accounts receivable                          32,700          28,900       +3,800

Merchandise inventory                     42,000          38,300        +3,700

Property and equipment                  121,500        100,800      +20,700

Less: Accumulated depreciation    (30,700)        (25,300)

Total assets                                 $202,800        $172,100

Accounts payable                          $36,700        $27,900        +8,800

Accrued wages expense                   1,400             1,800            -400

Note payable, long-term                 44,500         50,800         -6,300

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Cost of goods sold                      73,000

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Net income                                 $11,900

Additional Data:

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d. No dividends were declared or paid.

e. Other expenses:

Depreciation, $5,400

Wages            20,100

Taxes,               6,100

Other,              6,500

f. Assume that expenses were fully paid in cash, when there are no liabilities account related to them. For example, tax expenses are paid in cash since there is no taxes payable.

Wages Payable

Beginning balance             $1,800

Wages expense $20,100

Ending balance      1,400

Cash paid                           19,700

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