Net present value method, internal rate of return method, OBJ. 3 and analysis for a service company The management of Advanced Alternative Power Inc. is considering two capital investment projects. The estimated net cash flows from each project are as follows:

Year Wind Turbines Biofuel Equipment 1 $280,000 $300,000 2 280,000 300,000 3 280,000 300,000 4 280,000 300,000 The wind turbines require an investment of $887,600, while the biofuel equipment requires an investment of $911,100. No residual value is expected from either project.

Instructions 1. Compute the following for each project:

a. The net present value. Use a rate of 6% and the present value of an annuity of $1 table appearing in this chapter (Exhibit 5).

b. A present value index. Round to two decimal places.
2. Determine the internal rate of return for each project by

(a) computing a present value factor for an annuity of $1 and

(b) using the present value of an annuity of $1 table appearing in this chapter (Exhibit 5).
3. What advantage does the internal rate of return method have over the net present value method in comparing projects?