Question
Net Present Value Method, Internal Rate of Return Method, and Analysis The management of Advanced Alternative Power Inc. is considering two capital investment projects. The
Net Present Value Method, Internal Rate of Return Method, and Analysis
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 | Bio Fuel Equipment | |
| Present value of annual net cash flows | $fill in the blank 1 | $fill in the blank 2 |
| Less 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 |
1b. Compute a present value index for each project. If required, round your answers to two decimal places.
| Present Value Index | |
| Wind Turbines | fill in the blank 7 |
| Bio Fuel 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 percent.
| Wind Turbines | Bio Fuel 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 % |
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Horngrens Cost Accounting A Managerial Emphasis
Authors: Srikant M. Datar, Madhav V. Rajan
16th edition
134475585, 978-0134475998, 134475992, 978-0134475585
