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Please address case 17: Centennial Pharmaceutical Corporation by considering the following questions (and showing the calculations) in your paper:

1. What would you estimate as the present value of the future bonus payments under the original EP assuming that the 100% level for each bonus payment is expected to be paid each year for the remaining three years of the EP? (assume that earnings for year 2 are high enough to invoke the MBS and use the 3-year government rate as the discount rate.)

2. What would you estimate as to the present value of the future payments under the revised EP? Again, you should use the 3-year government rate for all the cash flows and assume that earnings will exceed the 100% target level for each year. How does this number compare with your estimate from question 1?

3. How would your answer to question 1 change if the MBS effect occurred in year 4 rather than year 2?

4. Should the guaranteed cash flows be discounted at the same rate as the bonus payments? What discount rate would you recommend for the guaranteed payments? What discount rate would you recommend for the bonus payments?

5. How would your present-value calculations change for questions 1 and 2 if you used a 5.58% discount rate for the bonus payments and a 1.58% discount rate for the guaranteed payments? What arguments can you make to justify using two different discount rates?

6. As a CloneTech manager, would you vote to accept the revised EP as a good-faith adjustment to the original EP? Present a brief list of the reasons for your decision.

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