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 A is: Multiple Choice $18,266. $(15,000). $9,000. $(20,549). $3,266.

Answer 1

The NPV of Investment A is calculated by multiplying each year's cash flow by the present value factor for a 15% annual return, then summing these up and subtracting the initial investment. The final NPV of Investment A is $3,266 when rounded to the nearest dollar.

Step-by-step explanation:

The Net Present Value (NPV) of Investment A can be calculated by multiplying each of its cash flows by the corresponding present value factor for a 15% annual return, and then subtracting the initial investment.

To calculate NPV, the cash flows for Investment A in each year are:

• Year 1: $8,000
• Year 2: $8,000
• Year 3: $8,000

Using the present value factors given, we calculate the present value of these cash flows as follows:

• Year 1 PV: $8,000 × 0.8696 = $6,956.80
• Year 2 PV: $8,000 × 0.7561 = $6,048.80
• Year 3 PV: $8,000 × 0.6575 = $5,260.00

Now we add up all the present values for the different periods to get the total PV of cash flows:

Total PV of cash flows = $6,956.80 + $6,048.80 + $5,260.00 = $18,265.60

Finally, we subtract the initial investment to find the NPV:

NPV = Total PV of cash flows - Initial investment

NPV = $18,265.60 - $15,000 = $3,265.60

Therefore, the Net Present Value of Investment A is $3,266 when rounded to the nearest dollar.