How Much Does Patrick Mahomes’ Contract Really Worth?
Calculating the value of probably the biggest contract in the sport.
American Football fans around the world are in shook after the Kansas City Chiefs signed Patrick Mahomes with a 10-year contract worth $503 million with a guaranteed value of $477 million. To reap the maximum worth of his contract, Mahomes will have to reach the AFC conference final and the Super Bowl as he will get $1.25 million for each achievement.
The value of this contract is massive — let alone for the NFL — to the point that right now it serves as the largest sum of contract given to an American athlete after Mike Trout’s blockbuster 12-year contract worth $426 million.
As a Financial Management student, I’ve been asking myself — If I were the agent of Patrick Mahomes, how much is the Present Value of the contract?
According to Investopedia, Present Value is the current value of a future sum of money or stream of cash flows given a specified rate of return. Future cash flows are discounted at the discount rate, and the higher the discount rate, the lower the Present Value of the future cash flows. You can use this formula to calculate Present Value:
Let’s look at the details of Mahomes’ contract based on sportrac.com:
With a little bit of Excel magic, it’ll become like this:
Albeit having everything self-explanatory, let’s have some assumptions before we calculate the Present Value:
- The value of the discount rate is 3.478% based on the real interest rate that has been adjusted by the USA’s annual inflation per December 31, 2019. (data.worldbank.org)
- We will not be accounting the $140 million guaranteed money since there is no clarity (yet) regarding the when and how Mahomes will receive the money.
- There will be three models, which are: A.) When the Chiefs fail to win the AFC Championship; B.) When the Chiefs win the AFC Championship; and C.) When the Chiefs made it to the Super Bowl.
- Since the contract has a no-trade clause, we will not be discussing trade scenarios.
Based on the assumptions above, we can calculate the Present Value of Patrick Mahomes’ mega-contract as below:
Based on the model simulation above, the minimum Present Value of Patrick Mahomes’ contract is $387.36 million, with the contract’s initial value of $479.6 million. That is already a hefty sum, and he got it without even having to achieve big accolades like contending for a conference championship or a Super Bowl title.
If Mahomes performs on the highest level throughout his 10-year tenure, he will max out his contract earning and the Present Value of his earning will be $407.5 million with the contract’s initial value of $504.6 million.
What we can conclude from this analysis is that despite not having the same exact value of the agreed contract by approximately $100 million, what Patrick Mahomes will receive is beyond comprehension. This will easily outvalue Eli Manning’s career earnings of $252.3 million.
Now the question is, will Patrick Mahomes able to perform on the level that it will justify the money Kansas City Chiefs paid to him? Only time will tell.
Written by Ikhsan Abi Nubli
Translated and edited by Ammarsha Rewindra Ridwan
