
(a)
(a)

Explanation of Solution
Given information:
Rate of interest (r) is 10%.
Cost is 30,000.
Calculation:
The general formula for calculating the present value of mixed stream is shown below:
The future earnings will increase $48,000, and currently Mr. M makes $40,000 in a year. Thus, increase in future earnings (AP) is $8000. Substitute the respective values in Equation (1) to calculate the net present value (NPV).
Net present value is $326.
(b)
Mr. M’s decision about career change.
(b)

Explanation of Solution
Since the net present value of earnings after career change is positive, the person should change his career.
(c)
Present value.
(c)

Explanation of Solution
Given information:
Rate of interest (r) is 10%.
Annual payment (AP) is $40,000 (from truck driving).
Calculation:
The calculation of the present value is shown below:
Substitute the respective values in Equation (2) to calculate the PV of the earning for truck driving.
Present value from truck driving is $151,631.47.
Using the same Equation (2), calculation of the present value from florist is shown below:
Present value from florist is $181,957.80.
The present value of earnings from florist is greater by $30,326
Present value (PV): The present value refers to today’s value of a future amount.
(d)
Excess revenue from the florist business.
(d)

Explanation of Solution
Excess revenue earning from florist over the truck driving can be calculated as follows:
The excess revenue is $326, which is equal to subpart ‘a’ answer.
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Chapter 14 Solutions
Microeconomics
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