Tuesday, November 27, 2012
Time Value of Money
The Dodgers/Fox have reportedly signed a 6 billion$ TV deal covering a 25 year period. That works out to an average of 240 million$ a year. That sounds like alot, but it’s actually too high.
Let’s say that Fox will give the Dodgers 240MM$ a year each year for 25 years. Is there another way to structure those payments? Well, if both agree that a 4% inflation rate is appropriate, then Fox could give Dodgers 156MM$ in the first year, then 4% higher each year, until the 25th year when they give the Dodgers 400MM$. The total comes in at 6.5 billion$ in cash outlay. But either way, it’s 3.9 billion $ in today’s dollars.
They could just as well have said 3.57 billion$ over 17 years (210MM$ of equal payments), and it would have been EXACTLY THE SAME. In that light, it’s not as otherworldly, when compared to the Angels’ deal of 2.5 billion$ over 17 years.
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