A-Rod: Signing the best player in Baseball

Assignment Questions:
1. What is the pre-tax present value of the incremental costs of signing Alex Rodriquez?
2. How many extra tickets do you expect the Rangers to sell each year if they sign Rodriquez? What is
the pre-tax present value of those additional spectators? (Hint: Consider using a regression to
estimate additional attendance for each additional win).
3. What is the change in the probability of the Rangers participating in the American League
Championship Series and the World Series? What are the expected pre-tax cash flows and the
associated pre-tax present value? (Hint: See information on play-off probabilities for Rangers
provided below).
4. Will signing of Alex Rodriquez increase the potential sales price of Rangers? If so, what is the pre-tax
present value? Assume that Rangers would be sold in 10 years, right after the expiration of Alex
Rodriquezs contract.
5. Should Texas Rangers sign Alex Rodriquez? If you find that the pre-tax present value of the
incremental costs exceeds the pre-tax present value of incremental benefits, how much would ticket
prices have to increase for the Rangers to breakeven?
Note on baseball playoffs:
The Texas Rangers play in the American league of major league baseball, which consists of 14 teams.
Each year top 4 of those 14 teams compete for the right to play in the World series. There are 3 sets of
play-offs: 1. A first round that involves 4 American league teams, 2. The American league championship
series that involves two American league teams and 3. The world series in which the winner of the
American league championship plays the winner of the Nations league championship. Use the following
estimates of play-off probabilities:
1. Probability that the Rangers make play-off without Rodriquez is 0.28.
2. Probability that the rangers make play-off with Rodriquez is 0.42.
3. Probability that the Rangers will advance to American league championship series, conditional
on making playoffs is 0.50 (with or without Alex Rodriquez).
4. Probability that Rangers will advance to World series, conditional on making to playoffs is 0.25
(with or without Alex Rodriquez).