Tom is considering selling his transportation logistics business for a sum of $2.68

million.1 However, he has just been informed that his company has won a contract to manage

the deliveries for a furniture factory in Orillia for a period of 8 years. The contract will result

in a flow of net income payments (profit) for Toms company equal to $425,000 per

year. Tom is trying to decide whether he should sell the company, or whether he

should keep the company in order to benefit from the flow of net income during the period of

the contract and then shut it down afterward.

a.) Which option will give Tom the highest present value, assuming he has a

nominal discount rate of 4 percent under continuous compounding?

b.) What would be the present value of the contract if it continued indefinitely (i.e. no

terminal date)?