Alfarsi Industries uses the net present value method to make investment decision

Question

Alfarsi Industries uses the net present value method to make investment decisions and requires a 15% annual return on all investments. The company is considering two different investments. Each require an initial investment of $15,900 and will produce cash flows as follows:

The present value factors of $1 each year at 15% are:

The present value of an annuity of $1 for 3 years at 15% is 2.2832

The net present value of Investment A is:

Explanation / Answer

Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)

=8900*2.2832

=20320.48

NPV=Present value of inflows-Present value of outflows

=20320.48-$15900

which is equal to

=$4420.48.

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