Suppose that Ruth is married with a family Her net present v

Suppose that Ruth is married with a family. Her net present value of moving is $40,000 and her spouse’s net present value of moving is -$30,000. She has two children, each with a net present value of -$10,000.

(a) Assuming equal weighting, should the family move?

(b) Should the family move if the parents are weighted more heavily (75% on parents, 25% on children).

Solution

a. Assuming Equal Weighing

NPV assuming Equal Weighing = ($40000 - $30000 - $10000 - $10000 ) / 4 = -$2500

as the NPV is negative it is not recommended to move

b. If Parent Weighed more Heavily

NPV = ($40000 - $30000) * 75% - $20000 * 25%

NPV = $7500 - $5000 = $5000

As the NPV is positive the family should move