Alfarsi Industries Uses the Net Present Value Method to Make

question 104

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 B is:

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

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Definitions:

Unearned Revenue

This is income received by a business for goods or services yet to be delivered or performed. It's considered a liability until the product or service is delivered.

Cash Payment

A transaction in which a payment is made using physical currency or through a digital cash transfer rather than credit.

Deferred Tax Asset

An asset on a company's balance sheet that may be used to reduce future tax liability; it arises when a company has overpaid taxes or paid them in advance.

Wages Expense

An accounting term that refers to the total cost incurred by a company to pay its employees, recognized in the period employees perform the work.