Making Sense of Contract between M.S. Dhoni and UB Group in Radiance of Net Present Value


By

Satish Kumar Matta
M.Com, PGDM, MBA, M.Phil, Phd (Pursuing)
Asst. Professor
Sonam Panjwani
Student PGDM 5th Trimester
Sachin Mahehwari
Student PGDM 5th Trimester
Lloyd Business School
Greater Noida
 


"I do not know what the Seven Wonders of the World are, but I know the eighth…………compound interest" Albert Einstein.

Abstract

Mahendra Singh Dhoni Captain of present Indian Cricket team and Vijay Mallya - owned United Breweries Group recently involved mind-boggling deal amounting Rs. Twenty Six Crore for three years, the deal is thought to be the largest ever agreed by an Indian sports star. Although the contracts are undoubtedly large, the use of nominal rupees in estimating the size of these contracts is actually misleading because the contracts are generally multiyear contracts. The contract, however, requires the payment of approximately Rs. 8.667 crore a year for three years. In Present Value terms, assuming a discount rate of 10%, the contract is worth Rs. 23, 70, 33,333.

Key Terms: Time Value of Money, Compound Interest, Discounting or Present Value.

Introduction

Meaning of Time Value of Money: Crux of time value concept is that money has a time value. A rupee to be received a year from now is not worth as much today as a rupee to be received immediately.  'Money has time value' - i.e., the value of money changes over a period of time. The value of a rupee received today is different from the value of a rupee to be received after a year. A rupee today has more value than a rupee after a year.

Factors contributing to the Time Value of Money:

Money has a time value because of the following reasons:

(i) Individuals generally prefer current consumption to future consumption. The promise of a bowl of rice next week counts for little to the starving man.

(ii) An investor can profitably employ a rupee received today to give him a higher value to be received tomorrow or after a certain period,

(iii) Under inflationary economy the money received today has more purchasing power than money to be received in future.

(iv)   'A bird in hand is worth two in the bush': This statement implies that people consider a rupee today worth more than a rupee in the future, say,  after a year. This is because of the uncertainty connected with the future.

Thus, the fundamental principle behind the concept of time value of money is that a sum of money received today is worth more than if the same is received after some time. For example, if an individual is given an alternative either to receive Rs. 10,000 now or after six months; he will prefer Rs. 10,000 now. This may be because he may be in a position to purchase more goods with this money than what he is going to get for the same amount after six months.

Time value of money or time preference for money is one of the central ideas in finance. It becomes important and some time vital consideration in decision "Taking".

Valuation concepts or Techniques

The Time value of money implies

(i) That a person will have to pay in future more for a rupee received today; And

(ii)   A person may accept less today for a rupee to be received in future.

The above statements relate to two different concepts they are

I - Compound Value Concept

II - Discounting or Present Value Concept.

1 Compound Value Concept

In this concept the interest earned on the initial principal becomes a part of the principal at the end of a compounding period.

Compound interest has been rightly called the greatest of human inventions.1

Compounding of Interest Over 'N' years: The compounding of interest can be calculated by the following equation. A = P (1 + i) n

In which

A = Amount at the end of period 'n'

P = Principal at the beginning of the period.

i = Interest rate.

n = Number of years.

In the deal between M.S. Dhoni and UB Group if the entire amount of Rs. 26 crore is received at the time of agreement, at the end of third year it would be Rs. 34,60,60,000

Calculated by above method we get A = P (1 + i) n

A = 26, 00, 00,000(1 +.10)3

A = 34, 60, 60,000.

Alternatively, Compound Value table can be used. The table gives the compound value of Re. 1, after 3 years at 10% p.a. as 1.331. Hence, the compound value of Rs. 26, 00, 00,000 will amount to:

26, 00, 00,000 x 1.331 =   Rs. 34, 60, 60,000.

This compounding process will continue for an indefinite time period.
 

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Source: E-mail December 16, 2010

          

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