The Time Value of Money

Elizabeth Hutchinson

Finance 314

March 30th , 2023

 THE TIME VALUE OF MONEY 2

The Bobby Bonilla contract was a unique case in the world of sports in 2000. That

year, the New York Mets agreed to buy Bonilla’s remaining $ 5.9 million contract. Instead of

paying the remaining total amount, the New York Mets agreed on a structured deal. Bonilla

was to be paid $ 1.19 million for 25 years starting in 2011 (Axisa, 2021b). The deal meant

that Bonilla was to continue receiving payments until 2035. The money's time value needs to

be considered to determine whether the contract was suitable for both parties. The time value

of money is a fundamental principle in finance and investment. It refers to the concept that

money is worth more today than it is in the future due to its potential earning capacity. To

compare the present value of the contract to its future value, we need to discount the future

payments to their current values.

Assuming that the discount rate is 6%, the present value of the remaining payment in 2023

can be calculated as follows:

PV = FV / (1+r) ^ n

Where:

PV = Present Value

FV = Future Value

r = Discount rate

n = Number of years

From the above formula, the present value of the remaining payments would be:

PV = $ 1.19 million / (1+0.06) ^ 13

PV = $ 606,896.06

The values suggest that New York Mets would have saved $ 4.3 million would they

had opted to buy the contract in total in 2000 at $ 5.9 million. For Bobby Bonilla, the deal

was good as he would receive a steady income stream for 25 years (Axisa, 2021b). Since the

payment was deferred, he benefits from the time value of money. In conclusion, Bobby
THE TIME VALUE OF MONEY 3

Bonilla's contract could have been a better deal for the New York Mets. The actual discount

rate used in the analysis may vary depending on the inflation expectations, Met’s investment

return assumption, and other factors.

THE TIME VALUE OF MONEY 4

Reference

Axisa, M. (2021b, July 1). Bobby Bonilla Day: Why Mets still owe former All-Star $1.19M

per year until he’s 72. CBSSports.com.

https://www.google.com/amp/s/www.cbssports.com/mlb/news/bobby-bonilla-day-

why-mets-still-owe-former-all-star-1-19m-per-year-until-hes-72/amp/