The time value of money is everywhere and when you see large
cash flows over many years, you need to be careful about the reported values.
Consider the
analysis of Max Scherzer’s contract, which was stated as having a $210
million value. Even though Scherzer would pitch for only seven years under the
contract, he would receive $15 million per year for 14 years. At a 7 percent
discount rate, the present value of the contract is only $131 million. A more
typical contract, with the salary increasing over seven years, would result in
a present value of $158 million, and an equal annual salary of $30 million
would result in a present value of $162 million. That’s quite a disparity in
values. And, while we agree with the calculations, we aren’t convinced that the
seven percent rate being used as a proxy for the long-term return on the stock
market isn’t a bit low.
