Net Present Value Method, Internal Rate of Return Method, 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: Wind Biofuel Year Turbines Equipment $280,000 $300,000 280,000 300,000 280,000 300,000 280,000 300,000 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 Present Value of an Annuity of $1 at Compound Interest Year 6% 10% 12% 15% 20% 0.943 0.9090.893 0.870 0.833 2 1.833 1.736 1.690 1.626 1.528 2.673 2.487 2.402 2.283 2.106 3.465 3.170 3.037 2.855 2.589 4.212 3.791 3.605 3.353 2.991 6 4,917 4.355 4.111 3.785 3.326 CO 4.917 5.582 8 6.210 6 .802 107.360 4.355 4.868 5.335 5.759 6.145 4.111 3.785 3.326 4.564 4.160 3.605 4.968 4.487 3.837 5.328 4.772 4.031 5.6505.0194 .192 9 Required: 1a. Compute the net present value for each project. Use a rate of 6% and the present value of an annuity of $1 in the table above. If required, round to the nearest dollar. Bio Fuel Equipment Present value of annual net cash flows Wind Turbines 887,600 x Less amount to be invested Net present value 1b. Compute a present value index for each project. If required, round your answers to two decimal places. Present Value Index Wind Turbines Bio Fuel Equipment 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 o an annuity of $1 in the table above. If required, round your present value factor answers to three decimal places and internal rate of return to the nearest percent. Present Value Index Wind Turbines Bio Fuel Equipment 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 in the table above. If required, round your present value factor answers to three decimal places and internal rate of return to the nearest percent. Wind Turbines Bio Fuel Equipment Present value factor for an annuity of $1 Internal rate of return 3. The net present value, present value index, and internal rate of return all indicate that the compared to the although both investments meet the minimum return criterion of 6%. is/are a better financial opportunity Feedback 1a For each project, multiply the annual net cash flow by the present value of an annuity factor for 4 periods at 6% (Exhibit 5). Subtract the amount to be invested 1b. Divide the total present value of the net cash flow by the amount to be invested find the discount rate that is associated with this factor at four years 2. Divide the amount to be invested by the annual net cash flow. In Exhibit 3. Consider why the internal rate of return helps in comparing projects. Learning Objective 3