Question

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)

Answer 1

Ahmed should opt for big bonus on signing day of the contract and smaller payments in future. Because as per time value of money concept money recieved tommorow is lesser than the same money recieved today this means you can buy lesser things from same amount of money compared to things bought today. So as per this concept if Ahmed recieves big bonus on signing contract and smaller payment in future will have greater value compared to other option i.e. small amount now and bigger payments in future.

Where as Aljazeera would like to have small amount now and bigger payments in future by opting this option club would end up paying lesser money in todays time. Than means present value of this option would be lesser than the another option which is paying big bonus today and smaller future payments.