Harness Corp. has contracted with Tharp Contractors to build a new building. The building is scheduled for completion in two years. Tharp has given Harness one of three payment options:
Option 1 - Pay $2,000,000 immediately
Option 2 - Pay $1,100,000 at the end of each year for the next two years
Option 3 - Pay $2,500,000 at the end of the two year period
Assume that both Harness and Tharp use a 10% discount rate in making investment decisions.
1. Which investment option should Harness choose?
2. What payment option would Tharp like for Harness to choose?