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TB MC Qu. 24-110 Alfarsi Industries uses the net present value... Alfarsi Industries uses the net...

TB MC Qu. 24-110 Alfarsi Industries uses the net present value... 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 $15,800 and will produce cash flows as follows: End of Year Investment A B 1 $ 8,800 $ 0 2 8,800 0 3 8,800 26,400 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 $(15,800). $(20,093). $10,600. $4,292. $17,358

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Answer #1

Answer is $4,292

Investment A:

Cash Flows:
Year 0 = -$15,800
Year 1 = $8,800
Year 2 = $8,800
Year 3 = $8,800

Required Return = 15%

Present Value of Cash Inflows = $8,800 * PV of $1 (15%, 1) + $8,800 * PV of $1 (15%, 2) + $8,800 * PV of $1 (15%, 3)
Present Value of Cash Inflows = $8,800 * 0.8696 + $8,800 * 0.7561 + $8,800 * 0.6575
Present Value of Cash Inflows = $20,092

Net Present Value = Present Value of Cash Inflows - Initial Investment
Net Present Value = $20,092 - $15,800
Net Present Value = $4,292

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