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:

Economies of Scale

Economies of scale describe the cost savings companies experience as their volume of production increases, leading to a lower cost for each unit produced.

Profit Maximization

This entails a firm's goal to achieve the maximum profit by adjusting its production and sales strategies.

Elastic Segment

refers to a section of the demand curve where consumers are relatively responsive to price changes, indicating that the price elasticity of demand is greater than one.

Total Revenue

The overall amount of money generated by a firm from its sales activities, calculated as the unit price times the quantity of goods sold.