# HW 3 Answers - Homework 3 Solutions 3 In order to determine...

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Homework # 3 Solutions 3. In order to determine if Floyd should make the investment in the automobile mechanics course, we need to calculate the net present value of this decision. Since the cost of the course is incurred at a different point in time than the payoffs, we must put all monetary costs in present value terms to make them comparable. Cost of Course: -\$1,000 (incurred now; year 0) Forgone Income: -\$8,000 (incurred now; year 0) Incremental gain in earnings from course: \$13,000-\$8,000 =\$5,000 (received in years 1,2, 3) Since the costs (direct and indirect) are incurred in the present, they are already in present value terms. However, the future payoffs need to be placed in present value terms, using the given interest rate of 10%, and the formula: \$future=\$now*(1+i)^n Payoff in year 1: \$5,000 =\$now_year1*(1+0.10)^1…….\$now_year1=\$5,000/(1.1) Payoff in year 2: \$5,000=\$now_year2*(1+0.10)^2……. ..\$now_year2=\$5,000/(1.1)^2 Payoff in year 3: \$5,000=\$now_year3*(1+0.10)^3……. ...\$now_year3=\$5,000/(1.1)^3 Net present value of investment= -\$1,000-\$8,000+\$5,000/(1.1) + \$5,000/(1.21) +\$5,000/(1.331) = \$3,434.26 Since the net present value is positive, Floyd should invest in the automobile mechanics course. 7. General training is training that is usable at all firms and industries. It enhances the

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HW 3 Answers - Homework 3 Solutions 3 In order to determine...

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