a.
The
a.
Explanation of Solution
Calculations as per the given information:
Projects | Current value of the dollar realized today | Dollar realized after one year | Present value | Net present value at 5% |
A | $1000 | - | $1000 | $1000 |
B | -$100 | $1,200 | -$100+$1200/ (1+r) | $1042.86 |
C | $1,200 | -$200 | $1200-$200/(1+r) | $1009.52 |
In this, project B should be selected as it has the highest NPV.
Interest rates: The rates that were charged by the investor who is ready to lend his/her money for a certain period of time to the borrower.
Present value of money: This is the concept that is used by every investor or financial dealer where the value of the dollar received today is compared with the value of the dollar that is expected to be received later by using interest rates.
b.
The project that should be selected based on NPV calculated in part a.
b.
Explanation of Solution
The project with the highest net present value should be selected. In this, project B should be selected as it has the highest NPV i.e. $1042.86.
Net present value: Net present value refers to the positive or negative cash flows realized from the project after subtracting the PV of
Chapter 24 Solutions
Krugman's Economics For The Ap® Course
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