Here's how much Shohei Ohtani's contract is really worth with deferrals

Shohei Ohtani's very unique $700 million contract that will be paid out over the course of 20 years has the baseball world reeling over what it means for the Los Angeles Dodgers' ability to build around Ohtani. There's also significant speculation and discussion about the tax consequences for Ohtani himself that, with key personal facts and circumstances unknown or yet to develop, are impossible to answer with certainty at this time, and could very well make for an interesting tax court case in just over a decade.

But anyway, on the deal as it is today, Jon Becker made the astute observation that due to the time value of money, the deferrals on Ohtani's deal actually change the way we should think about the value of the contract. Technically, the time value of money exists for all multi-year contracts, but it's especially interesting for one like Ohtani's with such significant deferrals so far into the future.

I sat down to calculate the present value based on two scenarios: The deferred strategy Ohtani and the Dodgers went with against a level, $70 million per year payout for ten years.

But first, what is the time value of money, a crucial concept to at least understand at the basic level to make sense of this information? The time value of money is essentially mathematically accounting for the fact that a dollar today is worth more than a dollar a year from now. Inflation may reduce the value of the dollar, you could invest the dollar in a savings account and it could earn interest, etc. Basically, dollars in the future have a "present value" of what they're worth today. That can be computed simply by assigning an interest rate that you expect a dollar to "devalue" over time at. Here's an article that explains a bit more on the concept.

If that's a little bit too complex for you, just think of it this way: If I owe you $20, would you rather have the $20 in a year, or today? Most reasonable people would want it today, all else equal.

For the purposes of this calculation, we've used five percent for simplicity. There's some question over whether five or 4.43 percent is the better rate to use, but since we're mainly just looking for a baseline for comparison purposes here, we'll use a nice round five percent.

Present value of Shohei Ohtani's largely-deferred contract with Los Angeles Dodgers

In the following table, column one is the real cash flow of Ohtani's contract. Column two is the present value of those payments with a five percent interest rate used to calculate the present value of the future dollars.

For comparison, column three is the cash flow if the contract were paid out evenly over the 10-year length of the contract, with the corresponding present values (again, using a five percent rate) in column four.

Missing in all this is one key detail: Ohtani and the Dodgers could decide to restructure how the payments are timed later down the line, which may drastically alter the final present value of the deal.

But as of today, Ohtani is taking $338 million in present-day dollars when he could earn $544 million in present-day dollars if he were to not defer. That's a $206 million decrease to help get the team more resources to build (ignoring key facts that we don't have enough information to calculate, like tax planning).

A pretty hefty chunk of money to give up.