Alfarsi Industries uses the net present value method to make investment decision
ID: 2598984 • Letter: A
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 $15,100 and will produce cash flows as follows:
End of Year
Investment
A
B
1
$8,100
$0
2
8,100
0
3
8,100
24,000
The present value factors of $1 each year at15% are
1
0.8696
2
0.7561
3
0.6575
The present value of an annuity of $1 for 3 years at 15% is 2.2832
The net present value of Investment A is:
End of Year
Investment
A
B
1
$8,100
$0
2
8,100
0
3
8,100
24,000
Explanation / Answer
The net present value of Investment A is= (Cash Inflows* Present value of an annuity ) - Cash Outflow
= [ $ 8,100 * 2.2832 ] - $ 15,100
= $ 3,393.92
Hence the correct answer is $ 3,393.92
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.