39] 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 $14,200 and will produce cash flows as follows:
|
End of Year
|
Investment
|
|
A
|
B
|
|
1
|
$9,800
|
$0
|
|
2
|
9,800
|
0
|
|
3
|
9,800
|
29,400
|
The present value factors of $1 each year at 15% are:
|
1
|
0.8696
|
|
2
|
0.7561
|
|
3
|
0.6575
|
The present value of an annuity of $1 for 3 years at 15% is 2.2832
The net present value of Investment A is:
$19,331.
$(14,200).
$15,200.
$(22,376).
$8,175.