If you haven’t heard, Scott Boras and Manny Ramirez have rejected the Dodgers latest offer of a two year, $45 million contract due to the amount of deferred money in the deal. They rejected the offer despite the fact that it reportedly guarantees them $25 million for 2009 with a player option for 2010 at $20 million, giving Ramirez the best possible deal he could hope for.
Under this deal, he is guaranteed far more than his market value for 2009 (to be worth $25 million in a normal economic environment, he’d have to be a +5 win player – he’s not, and the environment isn’t normal), and he has the option of terminating the contract if he has a successful season. All the risk is transferred to the Dodgers here. If he declines in performance or gets injured, they’re still on the hook for the extra $20 million for 2010, in which case they could be looking at a $45 million deal that brings them a net of five or six wins. If he has another great year, he can hit free agency against next winter and try to cash in with an even better deal.
This is, without a doubt, a fantastic offer for Ramirez. And his camp is turning it down over deferred payments? This is ridiculous.
Time value of money isn’t very hard to calculate. Let’s assume that capital is worth 5% per year in this economy, just for the sake of argument. The rumored offer has the $25 million in deferred payments being setup to be paid at $10 million in 2010, $10 million in 2011, and $5 million in 2012, with no interest accruing.
Using the present value formula of PV=FV/(1+i)^n, where i is the interest rate and n is the number of periods of deferment, we can easily figure out how much money Boras and Ramirez are actually haggling over.
First Deferred Payment
$10 million / 1.05 = $9.52 million, $480,000 difference
Second Deferred Payment
$10 million / 1.1025 = $9.07 million, $930,000 difference
Third Deferred Payment
$5 million / 1.1577 = $4.32 million, $680,000 difference
The sum of the differences between present value and future value is $2.09 million. Manny’s $25 million deferred is worth $22.91 million in today’s dollars.
They’re haggling over $2 million dollars in value. They’ve got a sweetheart deal on the table, and they’re haggling over $2 million.
Give me a break. Sign the contract and get in camp. You aren’t even worth this contract, much less a better one.
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