Pettitte agrees to deal with Astros (December 11, 2003)
Pettitte will get $5.5 million next season, $8.5 million in 2005 and $17.5 million in 2006, according to contract details obtained by The Associated Press.
Using a 6% discount rate, I get that this is equivalent to a 3-year 30.8 million$ deal, as opposed to the signed 3-year 31.5 million$ deal. Unless I did my calculations wrong (certainly possible), but if Pettitte had signed a 3-yr backloaded as 1,1,30.5 (total 32.5), that this would also have been equivalent. Backloading is really not that big a deal. What about deferring? The equivalent of the above would be a 10-yr 37.3 million$ contract, with equal payments every year. In these days of lower discount rates, it's not that big a deal.
--posted by TangoTiger at 04:02 PM EDT
Posted 5:08 p.m.,
December 11, 2003
(#1) -
FJM
The present value of $5.5 M at the beginning of 2004 plus $8.5 M in one year and $17.5 M one year after that is $29.1 M, not $30.8 M. $30.8 M would be the value discounted to the END of 2004. You are correct, though, in your main point, that $5.5 M, $8.5 M, $17.5 M is equivalent to $1 M, $1 M, $30.5 M. It's also equivalent to ten annual payments of $3.48 M each.
Posted 5:15 p.m.,
December 11, 2003
(#2) -
tangotiger
I didn't say what the present value was, I simply said that a 3-yr 30.8 million$ deal would be equivalent to the signed 31.5 million$ deal (i.e., both of these have the same present-day value).