Question

In​ 2015, the Washington Nationals baseball team signed pitcher Max Scherzer to a contract to play for them for seven years. He would be paid​ $15 million dollars per year for 14 yearsan additional 7 years beyond the end of the time he would be committed to play for the Nationals. The contract was widely reported as being worth​ $210 million​ (or $15 million per year14 ​years). One baseball writer​ argued, though, that this deal serves as a nice reminder that the payment terms of a deal can have an impact on the actual value of the contract. Source: Dave Cameron, "Max Scherzer and When $210 Million Isn't $210 Million," fangraphs.com, January 19, 2015.Which of the following statements best represents the actual value of the contract? A. The actual value of the contract is $30 million for each year he plays. B. Scherzer's contract is worth $210 million on the day he signs it. C. The actual value of the contract is more than $30 million for each year he plays.D. The actual value of the contract is less than $30 million for each year he plays.

Answer 1

Answer: D. The actual value of the contract is less than $30 million for each year he plays.

Explanation:

Given that Mark sherzer will be paid $15 million per year for 14 years reflects a contract whose value at the time of signing is ($15 million × 14) = $210 million. However, the payment would not be paid at the of signing but spread over a period of 14 years with $15 million being splashed out annually. However, considering the time value of money, whereby the present value of a fixed amount decreases with time. Hence in actual sense, the $210 million face worth of the contract will actually be less than $30 million [$210/7(playing years)] as time progresses on the fixed amount paid yearly due to reduction in the value of the present value as time progresses.