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 $14,800 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: (Round intermediate answer to the nearest whole dollar.)

End of
Year Investment A B 1 $ 9,200 $ 0 2 9,200 0 3 9,200 27,600

Explanation / Answer

Present value of inflows=$9200*Present value of annuity factor(15%,3)

=$9200*2.2832

=$21005.44

NPV=Present value of inflows-Present value of outflows

=$21005.44-$14800

=6205.44(Approx)

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