Alfarsi Industries Uses the Net Present Value Method to Make

question 8

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:

$\begin{array} { l l } 1 & 0.8696 \\ 2 & 0.7561 \\ 3 & 0.6575 \end{array}$
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The present value of an annuity of $1 for 3 years at 15% is 2.2832 Which investment should Alfarsi choose?

• A) Only Investment B is acceptable.
• B) Only Investment A is acceptable.
• C) Neither machine is acceptable.
• D) Both investments are acceptable, but A should be selected because it has the greater net present value.
• E) Both investments are acceptable, but B should be selected because it has the greater net present value.

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