Chapter 3.6, Problem 1P

Explanation of Solution

 Calculation:

 The Net Present Value (NPV) of an investment is the amount by which the investment will increase the firm’s value.

 Let assuming the annual rate interest, r = 0.02, now the user can compute the NVP for investment 1 as,

 $\begin{array}{c}\text{NPV = -10000 +}\frac{24000}{1\text{ + r}}\text{ - }\frac{14000}{{\left(1\text{ + r}\right)}^2}\\ =-10000\text{ + }\frac{24000}{1\text{ + 0}\text{.02}}\text{ - }\frac{14000}{{\left(1\text{ + 0}\text{.02}\right)}^2}\\ =-10000\text{ + }\frac{24000}{\text{1}\text{.02}}\text{ - }\frac{14000}{{\left(1.\text{02}\right)}^2}\\ =-10000\text{ + }\frac{24000}{\text{1}\text{.02}}\text{ - }\frac{14000}{1.0404}\\ =-10000\text{ + }23529.118\text{ - }13456.363\\ =72\end{array}$