Problem

Evaluating whether or not to continue to share profits. Raymond is a senior partner in a...

Evaluating whether or not to continue to share profits. Raymond is a senior partner in a manufacturing firm and is approaching retirement age. In discussing succession planning with the company partners, two alternatives have been presented to Raymond. The first alternative would call for Raymond to receive a distribution of his share of current-year 2015 profits on March 31, 2016, along with a lump sum payment of $1,500,000 for his capital balance. The 2015 profit-sharing agreement is as follows:

3. On March 31, 2018, Raymond would receive a lump sum payment of $1,700,000 for his interest in capital.

In order for Raymond to make an informed decision he has come to you seeking your advice on which alternative to accept. Raymond believes that they can invest all cash proceeds at a rate of 8% compounded annually. It is anticipated that the partnership will have income for years 2015–2017 of $550,000, $605,000, and $682,000, respectively.

Prepare a schedule that compares the two alternatives and expresses the respective cash flows in terms of their present value as of March 31, 2016, assuming an 8% discount rate.

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Solutions For Problems in Chapter 13