Ahmed is a professional football player in UAE. Aljazeera Club is negotiating with him to join...

Ahmed is a professional football player in UAE. Aljazeera Club is negotiating with him to join the club. The Club presented two offers to Ahmed; the first one is to pay him a big bonus on the signing day of the contract and smaller payments in the future, or a small amount now and bigger payments in the future. Which option should Ahmed accept and why? What about Aljazeera Club, which option is better for them? (The time value of money)

Expert Solution

He should always choose for option number one because it provide him with huge chunk of money at present value while smaller money at future value.

This theory could be attributed to time value of money which emphasizes at the amount of money today would be lesser than the amount of same money tomorrow so it would be better to receive more of the payments at present day as it will help him to realise most of the payments at present value while he will have very less to discount at future value.

The second option, since most of the payments are received in the future the discounting factor would be really high and the present value of money would be lower after discounting, so he should be going for receiving the chunk of money at present not future.

For Aljazeera club it is better to to pay late because it will help them to preserve the time value of money and invest that money to gain some return while paying upfront will reduce any chance of gaining from time value of money.

jeff jeffy answered 2 years ago

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