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:
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 B is:
A)$780.
B)$(15,780).
C)$9,000.
D)$39,797.
E)$(5,918).

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: 
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 B is:
A)$780. 
B)$(15,780). 
C)$9,000. 
D)$39,797. 
E)$(5,918).

Quizplus · Accepted Answer

To calculate the net present value (NPV) of each investment, we need to discount the cash flows back to their present value and then subtract the initial investment.

For Investment A:
PV of Year 1 cash flow = $10,000 / 1.15 = $8,695.65
PV of Year 2 cash flow = $5,000 / 1.3225 = $3,776.24
PV of Year 3 cash flow = $5,000 / 1.5225 = $3,287.09
NPV of Investment A = ($15,000) + $8,695.65 + $3,776.24 + $3,287.09 = $370.98

For Investment B:
PV of Year 1 cash flow = $0
PV of Year 2 cash flow = $5,000 / 1.15 = $4,347.83
PV of Year 3 cash flow = $15,000 / 1.3225 = $11,344.94
NPV of Investment B = ($15,000) + $4,347.83 + $11,344.94 = $780.77

Therefore, Investment B has a positive NPV of $780.77 and would be the better investment choice.

Alfarsi Industries Uses the Net Present Value Method to Make