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 $14,500 and will produce cash flows as follows: End of Year Investment A B 1 $9,500 $0 2 9,500 0 3 9,500 28,500 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: A. $18,739. B. $(14,500). C. $14,000. D. $(21,691). E. $7,190.

Answer 1

Answer:

E. $7,190

Explanation:

Net present value is the present value of after tax cash flows from an investment less the amount invested.

NPV can be calculated using a financial calculator

For project A,

Cash flow in year 0 = $-14,500

Cash flow in year 1 = $9,500

Cash flow in year 2 = $9,500

Cash flow in year 3 = $9,500

I = 15%

NPV = $7190.64

To find the NPV using a financial calacutor:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. After inputting all the cash flows, press the NPV button, input the value for I, press enter and the arrow facing a downward direction.

3. Press compute

I hope my answer helps you