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    Present value of alternatives

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    (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?

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    Solution Preview

    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

    Option A

    Year Cash flow Discount factor @ Discounted cash flow=
    1 70,000 ...

    Solution Summary

    The solution calculates the present value of 3 alternatives.