Why Pay More For Fewer Years?

Over at mlbtraderumors.com, there was a blurb recently about Miguel Cabrera's upcoming free agency (after the 2009 season, so don't hold your breath, Yankees fans). Cited therein was a blurb from Juan C. Rodriguez of the Sun-Sentinal.

Mr. Rodriguez suggests, "The same team unwilling to give Cabrera a $22 million AAV over eight years ($176 million) may deem six years and a $29 million AAV ($174 million) more palatable."

And mlbtraderumors.com asks, "I'm no economist, but does that make sense to you? I get the whole higher AAV, fewer years/risk concept. But explain to me why you wouldn't want two extra years for $4 mil more?"

Let's consider some hypothetical salary progressions for these two contracts:
Contract 1: 23-26-29-29-32-35 (avg 29)
Contract 2: 16-18-20-22-22-24-26-28 (avg 22)

First off, a lot of the valuation of these deals will be based on the concept of "Net Present Value", or how many 2010 dollars each future season will be worth. Using a 10% depreciation, the yearly values are:
10% annual discount rate:
Contract 1: 23-23-23-21-21-21 (avg 22)
Contract 2: 16-16-16-16-14-14-14-13 (avg 15)

Then, for purposes of risk management, always in the back of the mind for a team is going to be their exposure. If something catastrophic happens to their investment, and they get zero additional value from him for the length of the contract, how many "real" dollars are they out (adjusted to 2010 dollars). By year, here is the exposure each team has (in 2010 dollars):

2010: $133 (6-year contract), vs. $120 (8-year contract)
2011: $110 (6-year contract), vs. $104 (8-year contract)
2012: $86 (6-year contract), vs. $88 (8-year contract)
2013: $63 (6-year contract), vs. $72 (8-year contract)
2014: $42 (6-year contract), vs. $56 (8-year contract)
2015: $21 (6-year contract), vs. $41 (8-year contract)
2016: $0 (6-year contract), vs. $27 (8-year contract)
2017: $0 (6-year contract), vs. $13 (8-year contract)

So, if a team assumes that it is much more likely to be able to accurately project the next two years, and that M-Cab is very likely to be be worth the $23 and $26 in those years, they reduce their exposure starting in year 3.

I'm not saying it's a good idea, but that's the thinking that could make a shorter deal appear better.

(All dollar values are in $millions.)