Question

(Present Value) If I was 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?How about looking at it from the team's perspective?

250 Words.

Answer 1

If you would have been an athlete negotiating the contract,it would have been better to receive the amount at the current juncture because it would have been providing lesser reduction in the overall value of the bonus amount due to lesser deduction due to the concept of time value of the money.

The time value of money concept advocates that value of same amount of money today is higher than the value of the same amount of money tomorrow, because the money will be depreciating due to factors like inflation and it will be losing upon the disposable value.

So, it will be better to receive the amount at present in order to generate lesser opportunity loss due to time value of money and to make a rate of return in the future who could beat the return which is provided by Company.

From the teams perspective,it would be better to provide the amount at certain intervals because it will offer them flexibility and liquidity along with lagging opportunity and gain from time value of money concept so they would want to to pay the bonus at the later stages in installments