"The time value of money (TVM) is the concept that a sum of money is worth more now than the same sum will be at a future date due to itsearnings potentialin the interim" (Fernando, 2023). Understanding the concept of TVM in the context of NFL contracts involves examining how money to be received or paid in the future is valued in today's terms. This is crucial in sports contracts, which are structured to provide players with defined cash flows over time. For our example, let us consider a fabricated NFL player, Jack Titan, who has signed a contract that illustrates the application of TVM.

Jack Titan's Contract Overview:

• Total Contract Value:$75 million
• Duration:5 years
• Structure:
  • Signing bonus: $15 million (paid immediately)
  • Annual salary (guaranteed): $12 million annually, paid at the end of each year.

TVM Concept Applied:

The TVM concept suggests that a dollar today is worth more than a dollar in the future due to inflation and the opportunity cost of not being able to invest that dollar for a return. Therefore, Jack Titan's future cash flows from his contract must be discounted to present value to understand their true worth in today's dollars.

Discount Rate:

For our example, let us assume a discount rate of 7% per year, which reflects the potential return Jack could earn if he invested his money elsewhere.

Calculating Present Value:

The present value (PV) of future cash flows can be calculated using the formula:

PV=(1+r)nC

Where:

• C is the future cash flow,
• r is the annual discount rate,
• n is the number of years until the cash flow is received.

Applying the Formula:

2. Signing Bonus:Since the signing bonus is paid immediately, its present value is its face value of $15 million.
4. Annual Salary Payments:These are future cash flows and must be discounted.

Year 1:PV_{year 1} = \frac{$12M}{(1 + 0.07)^1} = $11.21M

Year 2:PV_{year 2} = \frac{$12M}{(1 + 0.07)^2} = $10.47M

Year 3:PV_{year 3} = \frac{$12M}{(1 + 0.07)^3} = $9.79M

Year 4:PV_{year 4} = \frac{$12M}{(1 + 0.07)^4} = $9.15M

Year 5:PV_{year 5} = \frac{$12M}{(1 + 0.07)^5} = $8.55M

Total Present Value:

To find the total present value of Jack's contract, we sum the present values of all future cash flows, including the signing bonus:

Total\ PV = $15M + $11.21M + $10.47M + $9.79M + $9.15M + $8.55M = $64.17M

Conclusion:

Though the face value of Jack Titan's contract is $75 million, its present value is approximately $64.17 million when considering the time value of money. This calculation demonstrates how future cash flows are less valuable in today's dollars, a critical concept in evaluating the true worth of professional sports contracts.