Devon Turner, who has been playing shortstop for the St. Louis Titans for five years, made the All-Star team in 2014. He has three years left on a contract that pays him $2.4 million a year. He wants to renegotiate his contract because other players with records similar to his are receiving as much as $10.5 million per year for five years.
Titans' management has a policy of never renegotiating a current contract but is willing to consider extending Turner's contract to additional years. In fact, the Titans have offered Turner an additional three years at $6.0 million, $9.0 million, and $12.0 million, respectively. They have also added an option year at $15.0 million. Manage- ment points out that this package is worth $42.0 million, or $10.5 million per year on average. Turner is considering this offer and is also thinking of asking for a bonus if and when he signs the contract.
Write a memorandum to Turner that comments on management's position and evaluates the offer, assuming a current interest rate of 10 percent. (Hint: Use present values.) Propose a range for the signing bonus. Finally, include other considerations that may affect the value of the offer.