Reference no: EM132686728

Offer #4 has a lump sum payment of $25m happening at t20. The Orioles may want to prepare for that payment by investing a little money in advance rather than needing to find all the money to handle this large expense in year 20. In fact, the CBA mandates that deferred money is fully funded within two years of the associated playing year (see Table 1). Regine was surprised to see that baseball is the only league with such a rule.

Problem 1: If the baseball CBA were like those of other leagues-i.e., the Orioles had freedom to fund their future obligations in however they wanted-how much would the Orioles have to invest in each of the following four scenarios to fully fund the account?

Problem 2: That is, how much do they need to put away in present value dollars to have $25m when the deferred compensation obligation comes due? Assume a 5.5% discount rate for each of the different funding approaches.

a. The Orioles make a single deposit today (t0).
b. The Orioles invest a small amount into an account each year, making constant payments annually starting at t1 and ending at t20.