You Have Just Been Hired as a Consultant to Help

question 56

Essay

You have just been hired as a consultant to help a firm to 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 percent over the next three years.
$$\begin{array} { | c | c | c | c | } \hline \text { Option } & \text { Profits in Year 1 } & \text { Profits in Year } 2 & \text { Frofits in Year 3 } \\\hline \text { A } & \$ 10,000 & \$ 80,000 & \$ 90,000 \\\hline \text { B } & \$ 50,000 & \$ 90,000 & \$ 100,000 \\\hline \text { C } & \$ 30,000 & \$ 100,000 & \$ 115,000 \\\hline\end{array}$$ a.Discuss the difference in the profits associated with each option.Provide an example of real-world options that might generate such profit streams.
b.Which option has the greatest present value?