D. Jacob is thinking to sign contract to consult a venture capital firm as an outside adviser for the next three years. The payment is fixed at $250,000 per year in nominal terms, paid at the end of each year.

D1. Suppose the rate of inflation is 4% per year, and Jacob's discount rate, in real terms, is 5%. What is the NPV of this offer? Nominal discount rate: (1+r) = (1+i)(1+rr) r = (1+i)(1+rr)1 = (1 + 0.04)(1 + 0.05) 1 = 0.092

NPV (can use annuity formula): NPV = C 1( 1 )N = 250000 1( 1 )3 = r 1+r 0.092 1+0.092

$630.574

D2. The venture capital firm also offers Jacob an alternative contract starting

at $240,000 in real terms, but indexed with inflation (i.e., growing at the inflation rate).

Which contract should Jacob choose?