Alfarsi Industries Uses the Net Present Value Method to Make

question 102

Multiple Choice

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:
The present value factors of $1 each year at 15% are:

The present value of an annuity of $1 for 3 years at 15% is 2.2832
-The net present value of Investment B is:

• A)$780.
• B)$(15,780).
• C)$9,000.
• D)$39,797.
• E)$(5,918).

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Definitions:

Fixed Rates

Interest rates that remain constant over the lifetime of a financial instrument, unaffected by market fluctuations.

Floating Interest

An interest rate that changes over the life of a loan or mortgage, based on the current market conditions or an index.

Solvency

The ability of an entity to meet its long-term debts and financial obligations.

Times Interest Earned Ratio

A financial ratio that measures a company's ability to meet its debt obligations by comparing its income before interest and taxes to its interest expenses.