Question
Alfredo Industries uses the net present value method to make investment decisions and requires a 15% annual return on all investments. The company is considering
Alfredo 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:
End of Year | Investment | |
A | B | |
1 | $8,000 | $0 |
2 | 8,000 | 0 |
3 | 8,000 | 24,000 |
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
Which investment should Alfredo choose?
Only Investment B is acceptable. | ||
Only Investment A is acceptable. | ||
Both investments are acceptable, but B should be selected because it has the greater net present value. | ||
Both investments are acceptable, but A should be selected because it has the greater net present value. |
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