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Tuesday, March 10, 2009
Publish whatever is in a press release
Manny is going to be paid “up front” (whatever that means? signing bonus? or his salary for the year spread over 6 months?) 10MM in 2009, with 5MM in each of 2010, 2011, 2012 on Jun 30. Somehow Yahoo reports this as:
Because of the money deferred without interest, Ramirez’s 2009 salary is given a present-day value of about $18.4 million by Major League Baseball.
This is taken from an Associated Press story. What the f does this mean?
10MM is 10MM in 2009, the “present day”. The 5MM in 2010, if you bring it back one year to Jun 30, 2009 at 5% is 4.75MM. The 5MM in 2011 is brought back to 4.51. So far, that’s 19.26MM. Add in the final 5MM in 2012 at 4.29MM present-day, and you have 23.55MM$.
Similarly, his second year has a present value (as of Jun 30, 2009) of 17.40. The total value of the contract is 41MM.
What voodoo math is begin performed to get a present-day value of 18.4?
Note: present-day value should really be done as of Jun 30, 2009. Why is that? Because if you sign a regular 1MM contract to be paid from Apr 1, 2009 to Oct 1, 2009, do you really want to report that by discounting all the payments back to Apr 1, and get something like 980,000$? No, you don’t want to do that for 800 contracts do you? So, you make the present-day Jun 30 of the current year. This way, ALL 1 year contracts receive the same discount rate (0%), and you just have to worry about contracts paid outside the current year.
In any case, perhaps the sports reporters can stop reporting the press releases, and ask whoever put their name on that press release how 25MM = 18.4MM. Because by my calculations, that is true only if the discount rate is 27.3%.
***
UPDATE: If you make the discount rate 3%, the SECOND year has a present-day value of exactly 18.4MM. In that case, the first year is worth 24.1MM, giving you a total of 42.5MM.
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