a) First assume that all of the deferred money and accumulated interest is paid out along with the final salary payment at the end of 2012. Use 5.5% as the discount rate. What is the present value (as of the signing date) of Ichiro’s contract under these circumstances? (Don’t forget the singing bonus.)
b) How much (measured in present value) in total have the Mariners saved by deferring the $5M every year instead of paying the $17M in full every year?
c) Now assume a 15% discount rate, but keep the interest rate for deferred money at 5.5%. How much (measured in present value) in total have the Mariners saved by deferring the payments?
d) Finally suppose that instead of paying out a lump sum of deferred money and accumulated interest at the end of 2012, the Mariners decide to pay Ichiro a fixed payment every year from 2013 until 2032. Still using a 15% discount rate and 5.5% interest rate on the deferred payments, calculate how much in sum the Mariners are saving over a contract that would pay Ichiro a straight $17M yearly payment.
This question was asked on Jan 21, 2013.
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