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 $14,800 and will produce cash flows as follows: End of Year InvestmentA B1 $ 9,200 $ 02 9,200 03 9,200 27,600The 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 (rounded to the nearest whole dollar) of Investment A 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 9,200 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 (rounded to the nearest whole dollar) of Investment A is:
Solution
To calculate the net present value (NPV) of Investment A, we need to discount the future cash flows to their present value and then subtract the initial investment.
The cash flows from Investment A are $9,200 at the end of each year for 3 years.
Step 1: Calculate the present value of the cash flows.
We can use the present value of an annuity formula here because the cash flows are the same each year. The formula is:
PV = Cash flow * Present Value Annuity Factor
So,
PV = 20,985.44
Step 2: Subtract the initial investment from the present value of the cash flows to get the NPV.
NPV = PV - Initial Investment
So,
NPV = 14,800 = $6,185.44
Rounded to the nearest whole dollar, the NPV of Investment A is $6,185.
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