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Your company is currently negotiating a contract with a major client to provide professional services for the next 4 years. The contract provides for your
Your company is currently negotiating a contract with a major client to provide professional services for the next 4 years. The contract provides for your company to be receive one of five compensation options:
- $250,000 to be paid at the end of each year for the next 4 years. The first payment will be made one year from now and each remaining payment will be paid annually thereafter.
- $1,000,000 to be paid now.
- $1,000,000 to be paid at the end of the 4-year contract period.
- $500,000 to be paid now and $500,000 at the end of the 4-year contract period.
- $400,000 to be paid now, and $200,000 to be paid 2 years from now and annually thereafter.
What is the value of EACH compensation option and which compensation option provides the company with the greatest value using discounted cash flow methodology? Assume the company can earn an annual rate of return of 4% with annual compounding on its investments.
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