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(a)
(a)
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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)
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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)
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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)
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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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