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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 $14,500 and will produce cash flows as follows: End of Year Investment A B 1 $ 9,500 $ 0 2 9,500 0 3 9,500 28,500 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 B is:

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Answer:

The net present value of Investment B is $4238.75

Explanation:

Solution

The Net present value = present value of cash inflows - present value of cash outflow

Now,

The Present value of cash outflows= initial investment= $14500

Thus,

The Present value of cash inflows: is defined as follows:

Since in project B there is only one inflow at the end of year 3, it is discounted to present using present value discount factor applicable for 3 years, 15% which is= 0.6575

so,

The Present value of cash flow at the end of year 3= 28500* 0.6575= 18738.75

NPV= 18738.75 - 14500= $4238.75

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