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

$1$ $$310,000$ $$650,000$

$2310,000650,000$

$3310,000650,000$

$4310,000650,000$

The wind turbines require an investment of $$802,590,$ while the biofuel equipment requires an investment of $$1,855,750.$ No residual value is expected from either project.

Present Value of an Annuity of $$1$ at Compound Interest

Year $6\%10\%12\%15\%20\%$

$10\mathrm{.}9430\mathrm{.}9090\mathrm{.}8930\mathrm{.}8700\mathrm{.}833$

$21\mathrm{.}8331\mathrm{.}7361\mathrm{.}6901\mathrm{.}6261\mathrm{.}528$

$32\mathrm{.}6732\mathrm{.}4872\mathrm{.}4022\mathrm{.}2832\mathrm{.}106$

$43\mathrm{.}4653\mathrm{.}1703\mathrm{.}0372\mathrm{.}8552\mathrm{.}589$

$54\mathrm{.}2123\mathrm{.}7913\mathrm{.}6053\mathrm{.}3532\mathrm{.}991$

$64\mathrm{.}9174\mathrm{.}3554\mathrm{.}1113\mathrm{.}7853\mathrm{.}326$

$75\mathrm{.}5824\mathrm{.}8684\mathrm{.}5644\mathrm{.}1603\mathrm{.}605$

$86\mathrm{.}2105\mathrm{.}3354\mathrm{.}9684\mathrm{.}4873\mathrm{.}837$

$96\mathrm{.}8025\mathrm{.}7595\mathrm{.}3284\mathrm{.}7724\mathrm{.}031$

$107\mathrm{.}3606\mathrm{.}1455\mathrm{.}6505\mathrm{.}0194\mathrm{.}192$

Required:

$1$a$.$ Compute the net present value for each project. Use a rate of $10\%$ and the present value of an annuity of $$1$ in the table above. If required, use the minus sign to indicate a negative net present value. If required, round to the nearest whole dollar.

Line Item Description Wind Turbines Biofuel Equipment

Present value of annual net cash flows $fill in the blank $1$ $fill in the blank $2$

Amount to be invested fill in the blank $3$ fill in the blank $4$

Net present value $fill in the blank $5$ $fill in the blank $6$

$1$b$.$ Compute a present value index for each project. If required, round your answers to two decimal places.

Project Present Value Index

Wind Turbines fill in the blank $7$

Biofuel Equipment fill in the blank $8$

$2.$ 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.

Line Item Description Wind Turbines Biofuel Equipment

Present value factor for an annuity of $$1$ fill in the blank $9$ fill in the blank $10$

Internal rate of return fill in the blank $11\%$ fill in the blank $12\%$

$3.$ 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 $10\%.$

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