A Ballpark figure is a rough approximation of what the actual value could be. For example, a manufacturer might ask his manager- “I know we haven’t really analyzed the actual costs yet, but can you give me a ballpark figure?”. As per the Idioms dictionary, the meaning of a ballpark figure is a number that is approximately correct.
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What is a Ballpark figure?
A ballpark figure is a relative valuation or rough numerical estimation of the actual value or price of a variable. It is usually calculated by applying a simple calculation instead of doing the actual calculation, which is more complex. Ballpark figures are usually used by auditors, retailers, and other professionals to calculate present or future results.
A ballpark figure is used in different aspects of our daily lives. It is used in business, professional as well as personal life. However, it is crucial to understand here that the ballpark figure is only an estimate, and it is not an exact or accurate value of something.
Origin of Ballpark Figure
Ballpark figures refer to guessing or roughly just estimating a value or range. The origin of this word comes from how during a match, a commentator would give an approximation of the number of audience by just looking around. It is considered to have started in the USA via baseball, but it is now a prevalent way of speaking worldwide.
Though ballpark figures are often used and can help establish a baseline for discussion, they should be considered nothing more than estimations. They are not complex numbers. A ballpark figure can be useful while establishing a placeholder for conversation or estimation purposes when a more precise number is not given or accessible.
Ballpark figure statistics are often blown out of proportion by marketers and professionals who must use encouragement to produce income or close agreements. Significant business and financial results should not be made on these numbers, though they could first perform as estimates developed via more comprehensive assessment.
Examples of Ballpark Figure
1. Time Value of Money
The basics of finance: The Rule of 72 is the most familiar example of using a ballpark figure. The rule merely asserts that to determine the amount of time it takes for an investment to double is given by the following simple formula:
T = 72/(100*r)
T – Time taken to double an investment.
r – Interest rate in decimal form (so r = 0.1 for 10%)
2. Bond Duration
Bonds come with all types of systems of measurement linked with them. One of the metrics is the bond duration. The duration of a bond is the understanding of its value to change in return to maturity. For the scope of this article, we will only look at how it is computed using a formula assessed to an evaluation of the duration.
3. Equity Valuation
The highly used discount percentage while valuing equities is the Weighted Average Cost of Capital (WACC). The WACC consists of many inputs, and some of the inputs are approximated rather than being unambiguously computed. Two such contributions are the beta and the equity risk premium (ERP), which determine the cost of equity.
There are several approaches to verify beta. The most obvious approach is to run a reversion of stock returns alongside the market returns. It directs to inconsistencies in the approximations of beta due to the data utilized (daily or weekly yields, length of history, etc.). To induce over such a question, an average or median of similar company betas from a trustworthy source is used to turn up at an approximation of the beta.
Similarly, the ERP, a consensus estimate, is used to do the computations as a replacement for doing the arithmetical work to compute it from raw data. For instance, a figure of about 5% is a familiar ballpark figure for the ERP. The concepts mentioned above are explained well in a survey, “Best Practices in Estimating Cost of Capital.”
4. Aptitude Tests
To ballpark means to estimate the value of something roughly. This method can prove to be beneficial in aptitude tests that involve large equations and complicated calculations. If someone is aware of the ballpark method, they can easily figure out the value nearest to the definite answer. While approximating, the decimal numbers can be rounded off, and a whole number can be considered in its place, then the sums would become a lot easier.
5. Real Estate
A related theory to a ballpark figure is the theory of a back-of-the-envelope calculation. The back-of-the-envelope calculation is the easy version of the actual computation that gives a ballpark approximation of the required amount.
A familiar example of such a calculation is the valuation of the cap rate in the real estate sector. There are detailed examples to determine the cap rate of an estate.
Ballpark Figure Wrap Up!
Ballpark figures help people get an idea of what things price. In turn, they let individuals shop around, escape surprises and get an idea of what is suitable. Ballpark figures are approximate values used to start analysis or move a deal forward when the required size or quantity of something is not yet determinable.
Ballpark figure approximations may be utilized for day-to-day purposes, such as evaluating how much food and drinks a hotel may need or how in how many months a person will be able to purchase a house.
Also, Ballpark figures are used all over in the business world, for example, estimating how much it may cost to extend into a given market or how many years it may take for a company to be moneymaking or sell to rationalize a large acquisition.
It can be used to approximate public acceptance of a theory, invention, and technology.
How important do you find a ballpark figure in estimating the actual value of a variable?
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