Essay, Pages 5 (1005 words)
The possibility of signing Alex Rodriguez in 2000 represented a major opportunity for the Texas Rangers. Rodriguez by 2000 and at just 25 years of age had come a long way in his career. Among his triumphs were becoming just the third player to obtain 40 homeruns and 40 base steals in a year and winning the American League homerun record by a shortstop. Besides his success in the field, he had also developed a very broad appeal among the baseball audience.
In addition to considering Alex’s career and appeal when deciding to offer him a contract, Tom Hick’s (chairman of Southwest Sports Group), Mike Cramer (president and COO of Southwest Sports Group), and Doug Melvin (general manager of Texas Rangers) had to thoroughly consider the financial implications of doing so.
Throughout this paper, I will perform a simulation financial analysis of the projected benefits and expenses resembling the one that the Ranger’s team had to perform in 2000 to reach their final decision.
I will take the reader through an analysis of the total incremental revenues that would be generated by incorporating Alex into the Texas Rangers team discounted to reach present value figures. Following the revenue estimation, I will present the total incremental cost projections considering various data presented about Major League Baseball and the Rangers. This numbers will also be discounted to reflect the present value amount. Finally, I will explain the reasons for arriving at my final recommendations.
Incremental Revenue Projections from Signing A-Rod. In the case, it is mentioned that the Rangers team “believed that the right way to examine the financial attractiveness of the contract was only to consider that portion of his salary and insurance premium that would compensate for the extra tangible and intangible benefits he brought to the team”.
Thus, I will only consider in my analysis the incremental revenues and costs resulting from signing Alexander Rodriguez. For my revenue projections I have developed two scenarios, on called conservative and one optimistic.
The conservative scenario considers an increase of audience capacity to 85% or 551,040 fans annually, Sponsorship income of 7% of total local revenue, 2 American League Championship Series wins in 2001 and 2004, and an increased franchise value of $100 million. The assumptions of the optimistic scenario involve an increase to 90% audience capacity or 747,840 fans annually, Sponsorship revenue of 10%, 3 American League Championship Series wins in 2001, 2004, and 2007, and 2 World Series wins in 2002 and 2006, and an increased franchise value of $200 million.
The total annual revenue was calculated for 20 years, 10 years for the actual time Alex Rodriguez is expected to play plus 10 years for which a portion of his annual pay is deferred. The components of the total incremental annual revenue generated by the Rangers post signing Rodriguez include local revenue (tickets, parking and concessions, merchandise, and sponsorships), incremental revenue from American League Championship and World Series, a deduction of 20% for the amount contributed for League revenue sharing, and a component for the intangible benefit of increased franchise value.
I decided to add a component for increased franchise value because this seems to be a significant benefit that will result from signing A-Rod even though it is not technically a cash inflow. I calculated the figure using the perpetuity formula with present values of $100 and $200 million. The discount rate used to determine present values of total annual incremental revenues was 8% per case information. These calculations are all presented in detail in sheets 1 and 2 of the attached excel file. Under the conservative scenario the total present value of the 20 year revenues was $162,761,658. 6 and under the optimistic scenario it was $298,315,307. 69. . Incremental Cost Analysis from Signing A-Rod Costs were also calculated based on the incremental expenses resulting from signing a star player such as Rodriguez as opposed to just another shortstop. The variables I used to calculate total incremental costs each year were the annual salary over the average pay for a short stop, the signing bonus, the portion of the annual salary deferred for 10 years at 3%, and contract premium at 10% of annual contract value.
The case states that Rodriguez’s former salary was below $4 million, so I assumed an average short stop salary of $4 million as opposed to the $3 million the case tells us is the starting salary for a beginning short stop. From the annual salary I deducted the portion deferred for 10 years and the average salary that would’ve been paid for any short stop to arrive at the incremental base annual salary amount for A-Rod. For the portions of the salary deferred for 10 years, I first calculated the net amounts to be paid including the 3% interest the author states that will also be paid.
I considered any other expense mentioned in the case as inevitable regular operating expenses that the team would have to pay for having any short stop on the team. Thus, by discounting the total annual expenses at 8% I arrived at a total present value cost of $147,152,231. 87 for signing Alex Rodriguez. Recommendation With the projected incremental revenue and costs analysis in place, I determined a net present value for the A-Rod investment of $15,609,426. 79 ($162,761,658. 66 – $147,152,231. 87) in the conservative scenario and $151,163,075. 82 ($298,315,307. 69 – $147,152,231. 87).
That would translate into a return of about 10. 6% for the conservative scenario and 102. 7% for the optimistic scenario. I would advise for the team to go ahead and offer the contract to Alex Rodriguez at $252 million. In both scenarios and through both measures of investment return, the results point toward the investment resulting in a profit greater than the opportunity cost of 8%. The talent and appeal of Alex Rodriguez merits the high value of the contract. I believe that the impact of such a player will result in tremendous benefits for the Texas Rangers in the short and long run.