Question

The Los Angeles Times headline announced today, “Bellinger Angry His Deal Is Worse than Betts’s”. The L.A. Dodgers just signed Cody Bellinger to a contract consisting of eight, end‐of‐year payments worth $9.0 million (M) each, with the first payment at the end of year 1. On the other hand, Mookie Betts’s recent deal calls for six annual payments of $7.0M, starting one year from now and ending six years from now, along with payments of $14.0M in 7 years and $17.0M in 8 years. Bellinger ranted via Twitter, complaining that his contract “is worth a million less than Mookie’s”. If you perform any time‐value analysis, use a discount rate of 5%/year. (a) First, how did Bellinger get his number of “a million”? (1 pt.) (b) Next, use what you’ve learned in this course thus far to shed light on Bellinger’s gripe. Indicate whether Bellinger is right or wrong, and briefly explain so he can understand.

Answer 1

Part (a)

Total cash flow of Bellinger contract= $9 Million a year* 8 years= $72 Million

Cash flow of Betts deal= 6 yearly payments of $7 Million, one of $14 Million after 7 years and one of 17 Million after 8 years.

Total of Betts deal=$7 Million*6+$14 Million + $17 Million= $73 Million

Hence the difference of $73 Million-$72 Million= $ 1 Million.

Part (b):

Discount rate is given as 5% per year. At this rate,

Present value of Bellinger deal= $9 Million*PVAF(5%,8)= $9 Million* 6.463213 = $58.17 Million

Present value of Betts deal= $7 Million*PVAF(5%,6) + $14 Million*PVIF(5%,7) + $17Million*(PVIF5%,8)

=$7 Million* 5.075692 + $14 Million*$14 Million* 0.71068 + $17Million*0.67684

= $35.53 Million + $9.95 Million+ $11.51 Million= $56.99 Million

This shoes that Bellinger is not right in his opinion. Present value takes into account of the interest till actual receipt of each payment. On comparing PVs of both deals, it is clear that Bellinger’s contract exceeds that of Betts deal by $58.17 Million- $56.99 Million= $1.18 Million.