A-Rod: Signing the Best player in Baseball Harvard Case Solution & Analysis

Introduction

The Texas Rangers is a baseball team in the United States of America. The team is in the eighth number in twenty baseball teams on the basis of revenues earned in 2000.

The matter of the case is that the management of the Texas Rangers is analyzing the investment decision. They were on the verge of offering Rodriguez a 10 year contract to leave the Seattle Mariners and play shortstop for the Rangers, who is becoming a free agent at the end of the 2000 season. For this reason, the management of Texas Rangers has decided to carryout the cost-benefit analysis of the proposal to see whether the contract with A-Rod is favorable to the Texas Rangers or not.

For this purpose the management has gathered the information from the experts of the baseball game to take knowledge of the extra chance of Texas Rangers to win the upcoming matches and on this basis to calculate the incremental revenues, earning personally associated with the A-Rod so that these could not be earned without taking the service of the player.

On the other hand,the management has also summed up the amount set to offer A-Rod for the contract.The amount decided is $252 million.

Problem statement

The problem is to analyze the decision whether the offer of $252 million will be financially viable to Texas Rangers and to see whether the service of A-Rod will give Texas Rangers any return on the investment. To analyze the decision we will have to make the cost and benefit analysis for the 10 years of the contract.

Analysis

Cost-Benefit Analysis

Every company used to decide whether or not to go for any investment on the basis of the cost-benefit analysis of a given proposal.If a proposal gives the company an inflow of targeted return, then the company makes the decision to go and start the proposal on the table and if it gives negative inflows or unfavorable returns, then the company rejects the proposal.

There are many ways to make the cost-benefit analysis of a given proposal;the most widely used model is the net present value method. In this method, all incremental cost and returns of a given proposal are discounted at the present value and then it is monitored that whether the present value of an investment is favorable and whether it gives the required rate of return to the company or not.

In the case of Texas Rangers, the proposal is to whether to make the ten year contract with A. Rod or not on the basis of the benefits and returns, which Texas Rangers can get from the contract. Currently, Texas Rangers had managed to sum up the value of the contract which it is going to offer.The amount is $252 m that is going to be paid in ten years’ time of contract. The amount will be paid in following order:

$21m from 2001-2004

$25m from 2005-2006

$27m from 2007-2010.

$2m will be paid as signing bonus every year from 2001-2005.

The contract with A. Rod is regardless of the performance or time out for injury. Therefore, Texas Rangers has decided to acquire the contract of insurance to cover any career ending injury of A. Rod. The premium payable will be 10% of per year contract value; therefore it will be about $2.52m per year in the insurance charge.A-Rod Signing the Best player in Baseball Case Solution

On the analysis of the possible benefits to Texas Rangers if A.Rod starts to play with Texas Rangers, the management has proposed the following benefits:

Texas Rangers have obtained the information from baseball experts and have come to know that A. Rod’s talent could allow Texas Rangers team to win eight more games per year.On the basis of this information, Texas Rangers have projected that on average Texas Rangers can draw 35000 fans per game for the 80 home games in 2000.Moreover, recently afan on average has paid $2.5 on parking and concessions, $1.8 on merchandise and on average ticket of $18.From this information and the eight additional winnings we have calculated the amount $7017500 will be additionally earned if A. Rod joined Texas Rangers. (All calculations can be seen in Excel sheet #1)

Secondly, the incremental amount of $10 million will be earned after Texas Rangers reach the American League Championship and the addition of incremental revenue of $20 million will be earned on reaching the seventh game of the World Series. (All calculations can be seen in Excel sheet #1)..............................

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A-Rod: Signing the Best player in Baseball

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