Use the following to answer question:
Table 14.4
Year
Investment I
Benefits and Costs
r = 0.10
Investment II
Benefits and Costs
r = 0.10
Investment III
Benefits and Costs
r = 0.08
0
-800
-800
-800
1
1,000
200
800
2
200
200
300
3
200
1,000
250
-(Table 14.4) Which of the following lists the investments in order from highest to lowest net present value?

Question

Quizplus · Accepted Answer

To calculate the net present value (NPV) for each investment, we need to use the formula NPV = -Initial Investment + (Benefit Year 1 / (1+r)^1) + (Benefit Year 2 / (1+r)^2) + (Benefit Year 3 / (1+r)^3). Using r = 0.10 for Investments I and II, and r = 0.08 for Investment III, we get:

NPV for Investment I = -800 + (1000/(1+0.10)^1) + (200/(1+0.10)^2) + (200/(1+0.10)^3) = $133.10
NPV for Investment II = -800 + (200/(1+0.10)^1) + (200/(1+0.10)^2) + (1000/(1+0.10)^3) = $38.65
NPV for Investment III = -800 + (800/(1+0.08)^1) + (300/(1+0.08)^2) + (250/(1+0.08)^3) = $247.42

Therefore, the investments in order from highest to lowest NPV are: I, III, II. Investment III has the highest NPV, followed by Investment I, and then Investment II. So the best choice is Investment III.

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