Question

Present Value If you were an athlete negotiating a contract, would you want a big signing bonus payable immediately and smaller payments in the future, or vice versa? How about looking at it from the team’s perspective?

I need a detailed answer with examples, thank you!

Answer 1

Considering the case i would like to opt for the alternative that pays me a lump sum amount initially and then smaller payments over the period of time because of the fact that the interest rates are fluctuating in the market and thus its better to get a signing bonus that I can use as per my wishes and invest in a profitable manner if available.

For Example:

If i get a smaller amount initially and then lump sum later and then interest rates in the market increases it is not a profitable trade because now the present value calculated earlier shall decline and thus I shall loose money however if it moves opposite then the trade is profitable but in both the scenarios I will have the sole responsibility to invest the money if I get it in lump sum initially.

The choice won't change even if the team as a whole is considered because lump sum money in starting means that the morale of the team is lifted also most of the funds can be utilised for the purposes a team needs rather than investing their own capital that has higher cost of capital.