(See attached file for full problem description)
You have just been hired as a consultant to help a firm decide which of three options to take to maximize the value of the firm over the next three years. The following table shows year-end profits for each option. Interest rates are expected to be stable at 8% over the next 3 years.
Option Profits in Year 1 Profits in Year 2 Profits in Year 3
A $70,000 $80,000 $90,000
B $50,000 $90,000 $100,000
C $30,000 $100,000 $115,000
Which option has the greatest present value?© BrainMass Inc. brainmass.com October 9, 2019, 5:45 pm ad1c9bdddf
Yes the answer is A
See calculations below.
Also look in the attached files (either) where formatting is conserved
We will discount the cash flows at the likely interest rate = 8% to get the Present values of the cash flows
Year Cash flow Discount factor @ Discounted cash flow=
1 70,000 ...
The solution calculates the present value of 3 alternatives.