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 InvestmentA B1 $ 8,000 $ 02 8,000 03 8,000 24,000 The present value factors of $1 each year at 15% are: 1 0.86962 0.75613 0.6575 The present value of an annuity of $1 for 3 years at 15% is 2.2832 The net present value of Investment B is:
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 8,000 1 each year at 15% are: 1 0.86962 0.75613 0.6575 The present value of an annuity of $1 for 3 years at 15% is 2.2832 The net present value of Investment B is:
Solution
To calculate the net present value (NPV) of Investment B, we need to discount the future cash flows to the present using the given discount rate of 15%.
The cash flows for Investment B are 0 at the end of year 2, and $24,000 at the end of year 3.
The present value (PV) of each cash flow is calculated by multiplying the cash flow by the corresponding present value factor.
So, the PV of the cash flow at the end of year 3 is 15,780.
Since there are no cash flows in the first two years, the NPV of Investment B is simply the PV of the cash flow in year 3 minus the initial investment of $15,000.
Therefore, the NPV of Investment B is 15,000 = $780.
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