Question

Can someone answer this question for me please. Thanks

Assume that you have been offered an executive position with a major corporation. The company gives you two compensation options: deferred compensation or advance payment. How would you decide which option to select?

Answer 1

Answer:

For evaluation of two options, you will calculate present values to factor in time value of money.

You will calculate the present value of deferred compensation discounting the same at your cost of capital.

You will select the option that gives you higher present value.

For example:

Let us assume:

Option 1 is advance payment of yearly compensation (at the beginning of year, start of employment) = $75,000

Option 2 is differed yearly compensation at the year-end = $80,000

Cost of capital = 10%

So:

PV of option 1 = $75,000

PV of option 2 = 80000 / (1 + 10%) = $72,727.27

Since PV of option 1 is higher, you will select option 1.