August 21, 2009 at 3:14 pm by Capitol Avenue Club under Draft, Front Office, Washington Nationals
With the help of one of my economics major friends, I’d like to present a break-down of the Present Value of Strasburg’s contract. For those of you unfamiliar with the concept, since money has a time-value (i.e. a dollar today is worth more than a dollar tomorrow), Strasburg’s $15.1 million, to be paid in certain increments, does not equal $15.1 million if he were to recieve a lump sum today. Here’s how it breaks down.
The deal is a 4-year deal with a signing bonus. This year, 2009, Strasburg gets a pro-rated portion of the MLB league minimum (~$400,000, so ~$100,000 for him) and a $2.5 million dollar portion of his signing bonus. Since he’s making that money right now, we’re assuming he gets it today. So the present value of his $2.6 million for 2009 is $2.6 million.
In 2010, Strasburg receives a $2 million salary and a $2.5 million dollar portion of his signing bonus. This $4.5 million does not equal $4.5 million 2009 dollars. Assuming a 12% rate of return (and daily compounded interest), the present value of Strasburg’s 2009 earnings is $3,991,221–over half a million less than what he would receive if he’d gotten paid today.
In 2011, Strasburg receives a $2.5 million salary and the final $2.5 million portion of his signing bonus. Again, assuming a 12% rate of return compounded daily, Strasburg’s 2011 earnings in 2009 dollars equals $3,933,216.
And in 2012, the final year of Strasburg’s deal, he receives a $3 million salary. This salary, in 2009 dollars, equals $2,093,070.
Adding it all together, Strasburg’s deal is worth, in 2009 dollars, $12,617,507. Nearly $2.5 million gets lost due to the time value of money.
My methods and assumptions are rather crude and this is more of an estimate than anything else.
That’s the advantage signing a MLB deal rather than just a bonus has for the club.
Of course, the main disadvantage is you have to place the player directly on your 40-man roster (i.e. you begin using his options immediately and don’t have those first 3-4 years of MiLB development). But with a player like Strasburg, he supposedly won’t need to develop in MiLB very much. So I think doing a MLB deal was the correct path for the Nationals.