Nonguarantid Contract

2. Due to a severe injury in a car accident, Sue will be unable to work and forfeits her nonguaranteed contract. Since the contract is nonguaranteed the team suffers no legal obligation to pay Sue and/or keep her around due to her injury. As a result, Sue not only lost her ability to be a professional athlete, but she also forfeited her form of income. The nonguaranteed contract that she signed would pay her 5 million dollars per year for the next five years. This would of course total to 25 million dollars. In going over our lecture we learn that the time value of money represents the concept that money in today’s dollars decreases in value the further out into the future it is expected to be received. Had Sue avoided the injury she would …show more content…
As a result, the jury was more then fair to Sue as she not only was able to cover the loss of her earnings she will be able to invest her money at 25,000,000 in a manner of her choice. One should elect to receive the whole lump of money in the first year in order to get the most value in interest. Even though I made up the interest in this problem, due to the concept of time value of money, the decrease in value further it is expected to be received demonstrates that Sue was awarded fairly by the jury. However, one can argue if the interest rate changes then the question cannot be really answered, as we do not know the annual rate of return. I answered the question on the basis of time value of money, as the concept sheds light on such issues brought by the question. That being said, the question doesn’t exactly take into account future earnings after the contract. This means that Sue could have had more money to earn after her current contract, but ultimately will be unable to due to the unfortunate accident that she was a part of. On the contrary, if we solely measured a contract on the basis of what the future value of 5,000,000 will be in 5 years then the our answer could