Chris Haroun breaks down Shohei Ohtani's $700 million deferred contract using the time value of money formula. Ohtani is betting that future earnings, championship bonuses, and investment returns will make waiting for the money worth more than taking it now.
Shohei Ohtani's wild $700 million deferred contract is more than a sports headline. It's a perfect case study in the time value of money. And here's the formula to calculate the future value. The Future value, or FV, equals the present value, meaning PV times 1 plus R, which is the annual return to the power of N, meaning years. Now, if somebody offered you 100 bucks now or 100 bucks a year from now, it's a no brainer to take $100 right now because that $100 could be earning for you during the year. What if somebody offered you $100 now or $110 in one year? Well, suddenly waiting a year might sound better, because $110 in a year is worth more than the $105 you'd be getting by investing 100 bucks now at 5%. And Ohtani understood this. Yet he intentionally chose to delay his pay, effectively betting on the future, trusting that the trade off would bring championships to LA and perhaps even benefit his own finances in the long run through tax strategies and investments.
