Assume a baseball player's development in the minor leagues yields -$250,000 per year for four years.If the player were to have a single big league season and be paid $350,000,how much revenue would the player need to generate to be considered a positive net present value project from the point of view of the team owner if the interest rate was 4%?

Question

Quizplus · Accepted Answer

In order for the player's development to be a positive net present value project, the present value of the player's revenue must exceed the present value of the player's development costs. Using a 4% interest rate, the present value of the development costs over four years is approximately $984,423. Using the same interest rate, the present value of the player's $350,000 salary is approximately $327,722. Therefore, the player would need to generate at least $1,312,145 in revenue to be considered a positive net present value project. Given that the player generated -$250,000 per year in development costs, the total revenue needed for a positive net present value project would be $1,450,000 ($1,312,145 + $250,000 x 4 years). Thus, the answer is A) $1.45 million.

Assume a Baseball Player's Development in the Minor Leagues Yields