Present value involves converting dollars received or paid in the future to their value in today’s
dollars. Use your knowledge of present value and the time value of money to analyze the fol-
lowing scenarios.Scenario ABarry Bonds, a highly successful baseball player, has recently become a free agent. Assume his
agent has negotiated potential contracts with three different ball clubs. The details of these
compensation packages are outlined below. For purposes of your analysis, analyze these options
as of today, the beginning of the calendar year.San Francisco Giants- A $1,000,000 signing bonus payable today.
- $2,000,000 per year for three years. The annual payments are payable at the end of the cal-
endar year, with the first payment occurring at the end of this year.
Chicago Cubs- A $2,000,000 signing bonus payable at the end of the calendar year.
- $1,000,000 per year for three years. The annual payments are payable at the end of the cal-
endar year, with the first payment occurring at the end of this year. - A $1,000,000 payment at the end of three years if he completes all three seasons with the
Cubs and does not retire prior to the end of his contract. You can assume for this exercise
that he intends to meet this condition of his contract.
Milwaukee Brewers- No signing bonus.
- $1,500,000 per year for three years. The annual payments are payable at the end of the cal-
endar year, with the first payment occurring at the end of this year. - A local endorsement contract that will pay $1,200,000 at the end of the first calendar year.
Which contract should Barry sign if the only relevant factor in his decision-making process is
the total value of the contract and he can earn 8% interest? Explain your answer and provide
any necessary supporting calculations.Scenario BKristen Nash recently won the jackpot in the New Jersey lottery while she was visiting her par-
ents. When she arrived at the lottery office to collect her winnings, she was offered the follow-
ing two payout options:- Receive $5,000,000 in cash today.
- Receive $2,000,000 today and $600,000 per year for 10 years, with the first $600,000 payment
being received one year from today. - Receive $1,000,000 per year for 10 years, with the first payment being received one year
from today.
Assuming that the market rate of interest is 9%, which payout option should Kristen select?
Explain your answer and provide any necessary supporting calculations.Giant Jumbo, Inc., is a manufacturer of recreational vehicles located in upstate New York. In
recent years the company has experienced a huge spike in sales volume, but has had difficulty
meeting demand because of limited manufacturing capacity. Backlogs have reached periods in
excess of six months, and the company has had to turn away an increasing amount of business
because of order backlogs. On November 1, 2005, Giant Jumbo issued $250 million of 10%486 Chapter 10 Liabilities
FINANCIAL ANALYSIS AND REPORTING CASES
Case 10-1
Time value of moneyCase 10-2
Bond issuance, convertible
bonds