Finance for marketing decisions for A-Rod
How the concept of NPV is used to solve Quantitative answers
The net present value is one of the capital appraising techniques used to determine the viability of a certain investments. It is used by existing or potential investors to gauge the suitability of project by comparing the discounted projects cash inflows and outflows. For a single project, the investor only accepts if the project has a positive NPV. For more than one project that is mutually exclusive, an investor should pick the one that has the highest NPV. In essence the NPV compares various discounted project’s cash flows at various particular period in present value with the equivalent cash value in today’s value. The rate used to discount the cash flows must consider the investments risks and the investor’s required rate of returns. For more than one projects, the best on to invest at is the one with the highest NPV (Drake, 2012).
For this case, the concept of NPV is used to determine the appropriate amount to pay the Rodriguez based on the additional revenue that he is expected to bring to Texas Rangers. In the process of deciding how much they should pay for him for the ten years contract that they are interested in signing him for, they have taken into consideration the discount rate that they will use to discount their future cash flow. The rate settled at was 10% and the one that the management thought will be appropriate for pricing the money they will spend in acquiring Rodriguez. The management believed that, if Rodriguez joined Texas Rangers, the expected future revenue, discounted at 10% is reasonable for the club to recover their initial investments based on the anticipated revenues and other benefits the club will receive for the 10 years period that Rodriguez will be their player. Thus the concept of the net present value as a capital appraisal method has been greatly used in this case study to guide the management on the appropriate amount to pay to acquire Rodriguez both as the upfront cost and other spending that will be incurred in bringing and retaining him within the Texas Rangers.
Net Present Value is very important in solving this quantitative answer of determining the appropriate amount to pay to acquire Rodriguez based on the following reasons. NPV helps to determine the viability of this investment project of acquisition as it will calculate the present value of this future investment. By using the selected discount rate of 10%, the management is able to determine how valuable is the current spending of acquiring Rodriguez covering the entire ten years period the club intents to sign him. This is based on the expected revenues as measured by the financial gains the club is expected to receive as a result of signing him into the club. Basically, the club expects to gain in popularity and increase confidence of the game’s fans because it is expected most of them will be proud if the club signs Rodriguez.
The use of NPV method of will enable the management to correctly determine whether it makes economic sense to sign Rodriguez as their player. This is based on the concept of the net present value that the investment is worthy if it gives a positive value of the NPV. This is done by discounting the future cash flows according to the expected rate of return of the investor, which under this case is 10% for Texas Rangers. Based on this consideration, the management will only sign Rodriguez if the expected cash flow discounted at their expected rate of 10% gives a positive NPV for the ten years period under considerations (Graham & Smart, 2011).
The net present value method of appraisal will enable Texas Rangers to determine the acquisition they will engage into given the fact the club can resort to acquire another lower priced player and do away with Rodriguez. Under this case, revenues and