Alfarsi Industries Uses the Net Present Value Method to Make

question 48

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: $\begin{array}{c}\text {End of}&&\text {Investment}\\\text {Year}\\&\text {A}&\text {B}\\1 & \$ 8,000 & \$ 0 \\2 & 8,000 & 0 \\3 & 8,000 & 24,000\end{array}$

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

$\begin{array} { l l } 1 & 0.8696 \\ 2 & 0.7561 \\ 3 & 0.6575 \end{array}$
- 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) $3,266.
• B) $(20,549).
• C) $(15,000).
• D) $18,266.
• E) $9,000.

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Definitions:

Balance Sheet

A document presenting an organization’s assets, obligations, and equity of shareholders on a specific date.

Short-term Investments

Financial instruments and assets that are expected to be converted into cash or sold within a period of one year or less.

Liabilities

Financial obligations or debts owed by a company to external parties, which must be settled over time through the transfer of assets, provision of services, or other means.