Alfarsi ndustries uses the net present value method o make investment decisions

Question

Alfarsi ndustries uses the net present value method o make investment decisions and re pines a S% on ua produce cash flows as follows eturn on all inves ents, The company is cons two dite ent investments Each er require an initial investment of S14,600 and wi End of Year 1 $9,480 9,400 9,400 28,200 Prim The present value factors of $1 each year at 15% are 0.8696 8.7561 0.6575 The present value of an annuity of SI for 3 years at 15% is 2 2832 The net present value of Investment A is Mutiple Choice $18.542 53.600 5682 End PgUp Home

Explanation / Answer

Investment A

present value of cash inflow

Annual return*PVAF at 15%

9400*2.2832

21462.08

cash outflow

14600

NPV

6862.08

2-

present value of cash inflow

Annual return*PVAF at 15%

11600*3.3121

38420.36

cash outflow

36600

NPV

1820.36

3-

sales

16300

expenses

7700

operating profit

8600

less tax-40%

3440

add depreciation

4300

net operating cash flow

9460

payback period

51000/9460

5.39

4-

Accounting rate of return = net income/initial investment

1820/35400

5.14%

5-

cost of machine

1804000

salvage value

31000

Annual depreciation on machine

(1804000-31000)/3

591000

Year

0

1

2

3

cash outflow

-1804000

792000

net income after tax

201000

201000

201000

add depreciation

591000

591000

591000

add salvage value

31000

net operating cash flow

-1804000

792000

792000

823000

present value factor at 12%

1

0.8929

0.7972

0.7118

present value of net operating cash flow = cash flow/(1+r)^n r= 12%

-1804000

707176.8

631382.4

585811.4

NPV = sum of present value of cash flow

120370.6

Investment A

present value of cash inflow

Annual return*PVAF at 15%

9400*2.2832

21462.08

cash outflow

14600

NPV

6862.08

2-

present value of cash inflow

Annual return*PVAF at 15%

11600*3.3121

38420.36

cash outflow

36600

NPV

1820.36

3-

sales

16300

expenses

7700

operating profit

8600

less tax-40%

3440

add depreciation

4300

net operating cash flow

9460

payback period

51000/9460

5.39

4-

Accounting rate of return = net income/initial investment

1820/35400

5.14%

5-

cost of machine

1804000

salvage value

31000

Annual depreciation on machine

(1804000-31000)/3

591000

Year

0

1

2

3

cash outflow

-1804000

792000

net income after tax

201000

201000

201000

add depreciation

591000

591000

591000

add salvage value

31000

net operating cash flow

-1804000

792000

792000

823000

present value factor at 12%

1

0.8929

0.7972

0.7118

present value of net operating cash flow = cash flow/(1+r)^n r= 12%

-1804000

707176.8

631382.4

585811.4

NPV = sum of present value of cash flow

120370.6

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.