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113 Alfarsi Industries uses the net present value method to make investment decisions and requires a...

113

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 $14,600 and will produce cash flows as follows:

End of
Year		 Investment
A B
1 $ 9,400 $ 0
2 9,400 0
3 9,400 28,200


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 A is:

Multiple Choice

  • $18,542.

  • $(14,600).

  • $13,600.

  • $(21,463).

  • $6,862.

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Answer #1

THERE ARE 2 WAYS OF CALCULATING ANSWER. I HAVE EXPLAINED BOTH THE WAYS.

METHOD 1 : USING PV FACTOR

METHOD 2 : USING PV ANNUITY FACTOR

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