Question

The signing of big-name athletes is often accompanied by great fanfare, but the numbers are often misleading. For example, in late 2014, catcher Russell Martin reached a deal with the Toronto Blue Jays, signing a contract with a reported value of $82 million. Not bad, especially for someone who makes a living using the “tools of ignorance” (jock jargon for a catcher’s equipment). And also in 2014, football player J.J. Watt signed a $100 million extension with the Houston Texans. It looks like Russell and J.J. did pretty well, but then there was quarterback Colin Kaepernick, who recently signed a new contract to play for the San Francisco 49ers. Colin’s contract had a value of $121 million, but this amount was actually payable over several years. The contract consisted of a $13 million signing bonus, plus $108 million to be paid in the years 2015 through 2019. Russell and J.J.’s payments were similarly spread over time. Because all three contracts called for payments that are made at future dates, we must consider the time value of money, which means none of these players received the quoted amounts. How much did they really get?

More details:
Russell gets $7 million next year, $15 million in 2016 and $20 million in each of the final three seasons.

J.J. six years contract: $30.8 M is guaranteed up front, $51.8M injury guarantee, $21M if he’s signed in 2016. Texans can hypothetically cut Watt after this year or next year and only pay him $30.8 million total. If Watt suffered a career-ending injury in the next two years, though, he'd get the full $51.8 million.

Colin: $12.3 million signing bonus and a 2014 salary of just $645,000, $61 million was only guaranteed if he were to suffer a career-ending injury. Each year of the contract after the first, the 49ers were free to cut Kaepernick and not owe him any more money. Kaepernick's seven-year, $126 million contract turned out to be a three-year deal worth a tad more than $39 million. That is less than the three-year, $45 million contract Mike Glennon signed with the Chicago Bears this past offseason.

** THE ANSWER DOES NOT HAVE TO BE EXACT. JUST ESTIMATE WHICH ATHLETE IS THE BEST OFF, FINANCIALLY.**

Answer 1

Note: we assume the discount rate = 10% for all the players for simplicity.

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Step 1. Initial Contracts

Russel Martin	82 Million (7 million next year,  $15 million in 2016 and $20 million in 2017, 2018, 2019)	Toronto Blue
JJWatt	100 Million (30.8 million fixed, 21 million if signed in 2016) Add- 51.8 million	Houston Texas
Colin Kaepernick	121 Million (13 million today, 108 million from 2015-2019) He got 39 million in 3 years 61 million- Only if he suffers career ending injury	San fransisco 49ers

Present Value -

I. Russel Martin-

discount rate- 10%

PV of cahsflows -

Y1 - 7/(1.1) = 6.36 million

Y2 - 15/ (1.1)^2 = 12.4 million

Y3 to Y5 - =15+13.7+12.4= 41 million dollars

Total Value - Approximately 60 million. Further, there is no career threatning injury clause, thus, the payouts will remain constant.

II. JJ-

Scenario 1: The player can get max 100 million if is signed throughout and gets injured at the end.

Scenario 2: He is signed this year, does not get injured and does not get signed next year: Payout- 30 million

Scenario 3: He is signed this year, does not get injured and gets signed next year: Payout-

= 49

Assumtion:  scenario 1 probability - 20%, Scenario 2 - 40%, Scenario 3- 40%

Expected Payout = (0.2*100 +0.4*30 +0.4 * 49) = 52 million (approx)

III. Colin - Was cut off after 3 years.

Y1 - 13 million

Y2 - 13 million

Y3 - 13 million

Present Value = = 36 million

Russel Martin would be financially most stable from the above calculations. However, the actual stability will depend on their actual scenarios. :)