Question
When Alex Rodriguez moved to the Texas Rangers in 2001, he received a lot of attention for his$252million contract (the total of the payments promised
When Alex Rodriguez moved to the Texas Rangers in 2001, he received a lot of attention for his$252million" contract (the total of the payments promised was$252million). He later moved to the Yankees, but assume the following in order to determine the value of his contract when he signed it:Rodriguez earns$16million in the first year,$ 17million in years 2 through 4,$19million in years 5 and 6,$23million in year 7, and$27million in years 8 through 10. He also receives his$10million signing bonus spread equally over the first 5 years($ 2million per year). His deferred payments begin in 2011. The deferred payment amounts total$33million and are$5million, then$4million, then eight amounts of $3million (ending in 2020). However, the actual payouts will be different. All of the deferred payments will earn3%per year until they are paid. For example, the$ 5million is deferred from 2001 to 2011, or 10 years, meaning that it will actually be$6.7196million when paid. Assume that the$4million payment deferred to 2012 is deferred from 2002 (each payment is deferred 10 years).
The contract is a 10-year contract, but each year has a deferred component so that cash flows are paid out over a total of 20 years. The contractual payments, signing bonus, and deferred components are given below. Note that, by contract, the deferred components are not paid in the year they are earned, but instead are paid (plus interest) 10 years later.
2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 |
$ 16 M | $ 17 M | $ 17 M | $ 17 M | $ 19 M | $ 19 M | $ 23$23 M | $ 27$27 M | $ 27$27 M | $ 27$27 M |
$ 2 M | $ 2 M | $ 2 M | $ M | $ 2$2 M | |||||
2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 |
Deferred | |||||||||
$ 5 M | $ 4 M | $ 3 M | $3 M | $3 M | $3 M | $3 M | $3 M | $3 M | $3 M |
Assume that an appropriate discount rate for A-Rod to apply to the contract payments is
7%per year.
a. Calculate the true promised payments under this contract, including the deferred payments with interest.
b. Draw a timeline of all of the payments.
c. Calculate the present value of the contract.
d. Compare the present value of the contract to the quoted value of$ 252million. What explains the difference?
a. Calculate the true promised payments under this contract, including the deferred payments with interest.
The true promised payments under this contract for years 1 through 5 are:(Round all values to the nearest integer.)
Year 1:$ million
.Year 2:$ million.
Year 3:$ million.
Year 4:$ million.
Year 5:$ million.
The true promised payments under this contract for years 6 through 10 are:(Round all values to the nearest million.)
Year 6:$ million.
Year 7:$ million.
Year 8:$ million.
Year 9:$ million.
Year 10:$ million.
The true promised payments under this contract for years 11 through 20 are:(Round all values to four decimal places.)
Year 11:$ million.
Year 12:$ million.
Years 13 to 20:$ million.
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