assig 3.docx - 1 a.$2000.

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1. a. there are 2 choices with $2000 . First one: choose project A only Second one: choose both project B and C And compare with the NPV, choose project B and C is better since the NPV is $230. b. If the project is mutually exclusive, I will choose project A since it has higher NPV. 2.  Firstly, convert the nominal discount rate to a real discount rate:     d = (.095-.04)/(1+.04)   = .052885 A major benefit is avoided medical care costs.  If it is assumed that the price of medical care inflates at the same rate as the general  price level, the present value can be calculated as: NPV = (-$425,000 + $68,000 + $18,000) + ($68,000 + $18,000)/(1+.052885) 1 + ($68,000 + $18,000)/(1+.052885) 2 + ($68,000 + $18,000)/(1+.052885) 3 + ($68,000 + $18,000)/(1+c) 4 + ($42,500)/(1+.052885) 5   = -339,000 + 81,680.34 +77,577.64 + 73,681.02 + 69,980.12 +  32,846.13   = -$3,234.75 If, instead, it is assumed that the price of medical care inflates 2  percent faster than the general price level, then the net benefits  are calculated as follows: NPV = (-$425,000 + $68,000 + $18,000)
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+ ($69,360 + $18,000)/(1+.052885)
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