a) 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 $14,000 and will produce cash flows as follows: End of Year Investment A B 1 $10,000 $0 2 10,000 0 3 10,000 30,000 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:

$5,725.

$(19,725).

$16,000.

$8,832.

b) A company is considering the purchase of new equipment for $63,000. The projected annual net cash flows are $25,600. The machine has a useful life of 3 years and no salvage value. Management of the company requires a 11% return on investment. The present value of an annuity of 1 for various periods follows: Periods Present value of an annuity of 1 at 11% 1 0.9009 2 1.7125 3 2.4437 What is the net present value of this machine assuming all cash flows occur at year-end?

$21,000

$3,600

$(441)

$24,600

$60,115

c) Poe Company is considering the purchase of new equipment costing $80,000. The projected net cash flows are $35,000 for the first two years and $30,000 for years three and four. The revenue is to be received at the end of each year. The machine has a useful life of 4 years and no salvage value. Poe requires a 10% return on its investments. The present value of an annuity of 1 and present value of an annuity for different periods is presented below. Compute the net present value of the machine. Periods Present Value of 1 at 10% Present Value of an Annuity of 1 at 10% 1 0.9091 0.9091 2 0.8264 1.7355 3 0.7513 2.4869 4 0.6830 3.1699

($15,731).

($4,896).

$15,731.

$4,896.

$23,775.