Problem
You work as a partner for a small business-consulting firm and you want to leave the company because of a better career option. Based on the partnership agreement, when a partner leaves the firm, his or her ownership in the firm is cashed out with an immediate payment worth 3 percent of the previous year's sales revenue. The firm generated a sales revenue of $5 million during last year. However, other partners would rather not have to pay out this big cash flow to you this year because they need the money to expand their business in the next two years. According to their estimation, the sales revenues will increase at a rate of 22.5% per year (annually compounded).
If the discount rate that applies to you is 10 percent, which of the following options would you prefer:
i. 3 percent of last year's revenue now, and another option is to take
ii. 2.5 percent of the expected revenue two years later.