Question
You worked as a partner for a small consulting firm and you want to leave the company. Based on the partnership agreement, when a partner
You worked as a partner for a small consulting firm and you want to leave the company. Based on the partnership agreement, when a partner leaves the firm, their ownership in the firm is cashed out with an immediate payment worth 3 percent of last year's revenue. Last year's sales revenue was $5 million. Other partners would rather not have to pay out this big cash flow this year because they need the money to expand over the next two years. According to the estimation, they can generate a revenue of $7.5 million in two years. Therefore, they provide you with two payment choices: one is to take 3 percent of last year's revenue now, while the other option is to take 2.5 percent of the expected revenue two years later. If the discount rate that applies to you is 10 percent, which payment option is optimal? Please explain the rationale. Thank you!
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started