Claim: A-Rod's Dollars Make Sense for Yankees

Vince Gennaro, a consultant to several MLB teams, calculates that Alex Rodriguez will generate $450 million for the New York Yankees.

Gennaro, writing at Yahoo, says that A-rod has what he calls "performance" and "marquee" value. Performance -- i.e. the extra wins that A-Rod will generate -- should bring in $305 million for the team and marquee value, or star power, will bring in $145 million.

Rodriguez's contract will cost the team a guaranteed $275 million plus $30 million for breaking Barry Bonds' record. Factoring in opportunity cost, Gennaro arrives at true value of A-rod to the Yankees:

As an alternative to spending money on A-Rod, the Yankees could put their cash in a 10-year Treasury Bond and earn a risk-free return of about 4.25 percent. The expected revenue stream from a 10-year player contract is at least as risky as a Triple-C rated junk bond, which currently yields 12.5 percent. By paying A-Rod a $275 million salary and bonus payments that could earn him $305 million, the Yankees can pay another $120 million in luxury taxes and still generate a fair return on their investment that compensates them for their risk.

Based on the timing of the cash flows - expected Yankee revenues and Rodriguez's compensation - the investment yields a positive net present value for the Yankees, even using a 12.5 percent discount rate.

But digging a little deeper raised one question for me. The Yankees will have a new stadium in 2009, which will mean for at least the next two years, the place will be packed with rabid Yankees fans, pretty much no matter how bad the team performs. And a team with the pockets of the Yankees is not going to perform too badly.

So by the time A-rod's contributions really start to matter for the Yanks bottom line, he'll be 36. Unless you're Barry Bonds (in more than just the genetic way), you're not going to perform as well in your late 30's as in your 20's and early 30's.

Here are Gennaro's estimates for the performance and marquee dollars that A-rod will generate for the Yankees:

Under what scenario could you pass on paying $305 million to A-rod and find another way to generate $13 million in profit over 10 years?

UPDATE (3:52 EST)
Trish comments:

The flaw with your theory is that someone is going to have to be paid to play third base. Someone not named A-Rod may actually not have a positive income generating value so therefore could account for a net loss instead of a 13 million dollar gain.

That's definitely on point. Going with A-rod was the safer bet. Still, I wanted to see what would've happened if the Yanks went with a known quantity who wasn't as good as A-rod, but would cost a lot less, so I did a back-of-the-envelope calculation using Mike Lowell. The Red Sox signed him for an average of $12.5 million per-year for three years. And as I wrote previously, over the past two years he's been about 2/3 of the on field player that A-rod has been.

Now, what if the Yankees inserted a Mike Lowell-type player whose on-field value changes in the same way as A-rod's from year-to-year for $13 million per-year over the next decade? I went through and linearly adjusted Gennaro's calculations for salary, luxury tax, and performance value of this Lowell-type player (in reality he'd be three or four different players over that decade) and assumed that he'd bring in about $2 million a year in marginal value (for a total of $20 million versus A-rod's $145 million). The end result is that he'd be worth about $10 million more to the Yankees than A-rod (not adjusted for inflation).

Of course, there is more risk involved here so you could argue that the end result is a wash. So while the Yankees certainly didn't overpay for A-rod (Boras' $350 million asking price seems particularly outlandish now), with some creativity and no doubt extra risk, a better business decision was in the realm of possibilities.