On December 13, 2007, Alex Rodriguez signed a 10-year, $275 million contract with the New York Yankees. Five years into the contract, it remains the largest sports contract according to Wikipedia. In fact, the second highest contract is Alex Rodriguez’s prior contract with the Texas Rangers. The contract has some built-in bonuses. Rodriguez receives an extra $6 million for each occurrence of passing the lifetime home run records of Willie Mays (660), Babe Ruth (714), Hank Aaron (755), and Barry Bonds (762). And if he passes Bonds for the all-time lead, there is another $6 million bonus. At the end of the 2012 baseball season, he had 647 home runs.
Assume that all payments in the contract are paid on January 2 of the respective years, beginning on January 2, 2008. The contract includes a $10 million signing bonus paid out as follows: $2 million on January 2, 2008; $1 million paid January 2 of each year 2009–2013; and $3 million on January 2, 2014. The salary is as follows (in millions):

Assume that the appropriate discount rate is 10%.
1. What was the present value of the contract on January 2, 2008?
2. How much present value (as of January 2, 2008) did Rodriguez lose by receiving the $10 million signing bonus over 5 years instead of immediately?
3. Do you agree that the contract was worth $275 million? Explain.
4. Give the journal entry to record his 2013 salary and bonus, assuming it is paid in cash along with any bonuses and that he does, in 2013, pass the home run record of WillieMays.

  • CreatedFebruary 20, 2015
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