The free agent market for position players has developed notably later than usual this offseason. Into January, almost all of the major bats remained on the board, and some began to call players like Justin Upton or Yoenis Cespedes good candidates for one-year pillow contracts. Very suddenly, that attitude changed.
First, Alex Gordon re-signed with the Kansas City Royals on a four-year, $72 million deal (with significant deferrals). It was considered a bargain for the reigning World Series champions and a potential sign that the market was low on hitters. Then, Gerardo Parra and Denard Span each signed for small multi-year deals.
The market then changed, as two major deals dropped without much build-up. Chris Davis finally re-signed with the Baltimore Orioles on a seven-year, $161 million contract with significant amounts deferred over 22 seasons. Following that came the bombshell that the Detroit Tigers had signed outfielder Justin Upton to a six-year, $132.75 million deal, with an opt-out following the second season.
Very quickly, it was noted that the significant amount deferred on Davis' deal ($42 million) did significantly change the present value of the contract. Once that, and the value of Upton's opt-out is considered, it's actually the case that Upton's smaller deal (on paper) is actually the more valuable of the two.
Matt Swartz of MLB Trade Rumors did research earlier this month and found that, with some case-by-case variation, opt-outs this offseason are worth roughly $20 million. Presumably, were that amount instead negotiated as cash, it would be split among the six guaranteed seasons of Upton's contract. With this estimate, his yearly salary increases from $22.125 million to $25.468 million per season.
With regard to Davis' deferred payments, ESPN's Buster Olney shed some light onto the Orioles' own evaluations of the deal's true cost.
@DCameronFG $42 million deferred with no interest over 22 years. Management valuation of deal is at $127.5m.— Buster Olney (@Buster_ESPN) January 18, 2016
Already, one can see that the reported value of Upton's deal, before including the opt-out valuation, is larger than Baltimore's own expected cost to keep Davis. However, to make this apples to apples, the same interest rate should be applied to Upton's opt-out adjusted deal over six years, to calculate the total difference.
The complete annual breakdown of both deals can be found on the players' respective FanGraphs pages (here and here). Since Davis' present value is already known ($127.5 million), as well as each year's future value payment, working backwards in Excel with a Time Value of Money formula can produce the interest rate used to calculate that present value.
In this case, it appears that the Orioles approximated a 4.767 percent interest rate over that time, a value which can then be applied to Upton's deal as seen below.
|Future Value||Present Value|
. . .
Spencer Bingol is a Featured Writer at Beyond the Box Score. You can follow him on Twitter at @SpencerBingol.