Afarsi Industries uses the net present value method to make investment decisions

Question

Afarsi 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 $14,900 and will produce cash flows as follows: End of Year Investment 1$9,100$ 2 9,100 3 9,100 27,300 The present value factors of $1 each year at 15% are: 0.8696 2 0.7561 3 0.657s The present value of an annuity of $1 for 3 years at 15% is 2.2832 The net present value of Investment B is:

Explanation / Answer

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

=$27300*0.6575

=$17949.75

NPV=Present value of inflows-Present value of outflows

=$17949.75-$14900

which is equal to

=$3050(approx).

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