A-Rod Hbr Case

A-Rod: Signing the Best Player in Baseball – Analysis and Recommendation

Introduction. In 2000, the most coveted free agent in all of Major League Baseball was Alex Rodriguez, aka “A-Rod.” A-Rod was an all-star about to enter the prime of his career. Experts of the game considered him a surefire Hall-of-Famer, perhaps to go down as one of the best ever to play the game. It is for these reasons and more that Texas Rangers Owner Tom Hicks was set to offer A-Rod a 10-year $252 million dollar contract offer, easily the largest offer in the history of baseball. The following case analysis examines whether Hicks was financially justified in his prepared offer and makes further recommendation concerning the contract offer to A-Rod.

Present Value Calculations – How much is $252 million dollars really worth? Perhaps the most important analysis of the A-Rod offer is the present value of the contract payout. In other words, $252 dollars is not being paid to A-Rod on the day he signs the bottom line – in fact, it’s spread out over the course of 20 years. To that end, the present value of those monies is significantly different than the actual payouts. The following chart details the scheduled cash flow payout and present value associated with each cash flow. (Note: More detailed calculations, including calculation formulas, can be found in the attached spreadsheet.)

Key Assumptions:

• Annual net payout includes base salary and signing bonus amounts. Net payout in years 2011 through 2020 includes the deferred amounts (from 2001-2010) that appreciated over 10 years at 3% interest annually.

• Present value calculations are based on annual net payout amounts and a discount rate of 8% (the rate “generally used” by the Texas Rangers organization.)

• A 10% annual insurance expense is not included in payout schedule to A-Rod but will be discussed in the final calculations/recommendation.

How much is A-Rod worth? Now that we have a better...