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 $15,000 and will produce cash flows as follows: End of Year Investment A B 1 $8,000 $0 2 8,000 0 3 8,000 24,000 The present value factors of $1 each year at 15% 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 B is:

a.$780.

b.($15,780).

c.$9,000.

d.$39,797.

e.($5,918).

Explanation / Answer

ANS(d) $39,797 ALFARSI INDUSTRIES Investment B Year Investments B P.V Factor@15% for 3 Years P.V 0 $        (15,000.00) 1 $ (15,000.00) 1-3 Year $           24,000.00 2.2832 $   54,796.80 NPV $   39,796.80 Investment A Year Investments A P.V.Factor @15% for 3 Years P.V 0 $        (15,000.00) 1 $ (15,000.00) 1 $             8,000.00 0.8696 $      6,956.80 2 $             8,000.00 0.7561 $      6,048.80 3 $             8,000.00 0.6575 $      5,260.00 NPV $      3,265.60

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