The Use of Time Value of Money in the World of Baseball

The first part of the assignment involves calculating the amount which the firm requires in the present. The formula for calculating the present value is the future value multiplied by 1 over 1 plus the rate of return raised by the number of periods. Substituting the figures with the formula where the discount rate is 5%, the number of periods is 10, and the future value is 2000, 000 gives an amount of $1,227,820 which is the amount required in the present date. The next step involves the calculation of the amount of money that the firm is required to set aside at the end of every year for the next ten years; this would entail using the same formula and substitute the given figures in the equation which results to an amount of 122, 800,000 as the amount that will be set aside at the end of every year in the following ten years in order to cover the liability which is expected.

Part 2

The time value of money is the idea that the same amount of money can be worth different amounts over a different period; this is because money tends to have different degrees of purchasing power over different time periods. The concept can further be explained using an example, for instance, if a person decides that they will put $10,000 under their mattresses for five years at the end of the duration she would still have the same amount. However, if she decides that she will put the money in a saving account with a return of 2% she will receive $11,401. Therefore the decision to put the money under a mattress incurs her $1041 opportunity cost. The manager of an important baseball athlete decides to choose the TVM decision tree method to use it. One side presents the PV formulas while the other sides have the FV formulas. If the manager decided to discount payments, the PV side is used; if the manager decides to compound payments, the page is flipped, showing the FV side. On the other hand before he evaluates any offers presented by major teams the manager is required to first master the TVM decision tree, by going through some practice problems such as asking pertinent issues which might arise while at the same time taking into account annuity for PV which might be delayed, FV growing annuity and the deferred compensation which ensures that he knows the formula he is required to use in order to calculate the FV and the PV (Offers, 2017).

There are a lot of factors in the world of baseball which would lead a team to structure its deals through the use of deferred payments. One reason includes the owner having a way in which they can earn returns on their money. In this case of Mets and Bonilla, the owners of Met received returns of 12-15% through the investments made with Bernie. Therefore investing with Madoff $5.9m, covers Bonilla’s Payments future while at the same time giving multimillion dollars return when it comes to the Wilpons. However, looking back the approach failed since the returns of Madoff resulted from a Ponzi scheme disguising itself as a smart financial decision. The owner, therefore, has businesses which they feel like they can earn better returns when it comes to their money.

References

Offers, U. t. (2017). Case Studies of Sports Management: Retrieved from Argosy University online library resources: http://eds.a.ebscohost.com.libproxy.edmc.edu/eds/pdfviewer/pdfviewer?vid=0&sid=89cfbf20-9fce-41a1-a3da-68ff707b819c%40sessionmgr4007