Question: 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
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:
| 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.
| Present Value of an Annuity of $1 at Compound Interest | |||||
| Year | 6% | 10% | 12% | 15% | 20% |
| 1 | 0.943 | 0.909 | 0.893 | 0.870 | 0.833 |
| 2 | 1.833 | 1.736 | 1.690 | 1.626 | 1.528 |
| 3 | 2.673 | 2.487 | 2.402 | 2.283 | 2.106 |
| 4 | 3.465 | 3.170 | 3.037 | 2.855 | 2.589 |
| 5 | 4.212 | 3.791 | 3.605 | 3.353 | 2.991 |
| 6 | 4.917 | 4.355 | 4.111 | 3.785 | 3.326 |
| 7 | 5.582 | 4.868 | 4.564 | 4.160 | 3.605 |
| 8 | 6.210 | 5.335 | 4.968 | 4.487 | 3.837 |
| 9 | 6.802 | 5.759 | 5.328 | 4.772 | 4.031 |
| 10 | 7.360 | 6.145 | 5.650 | 5.019 | 4.192 |
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.
| Wind Turbines | Biofuel Equipment | |
| Present value of annual net cash flows | ||
| 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 | |
| Biofuel 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 whole percent.
| Wind Turbines | Biofuel 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 is/are a better financial opportunity compared to the , although both investments meet the minimum return criterion of 6%.
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