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: Biofuel Wind Turbines Year 1 $330,000 Equipment 5590,000 590,000 2 330,000 3 3 330,000 590,000 4 330,000 590,000 The wind turbines require an investment of 5942,150, while the biofuel equipment requires an investment of $1,527,510. 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 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 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. , 1a. 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. Wind Turbines Biofuel Equipment Present value of annual net cash flows $ 1,046, 100 $ 1,870,300 Less amount to be invested 942,150 1,527,510 Net present value $ 103,950 $ 342,790 1b. Compute a present value index for each project. If required, round your answers to two decimal places. Present Value Index Wind Turbines 2.855 X Biofuel Equipment 2.589 X 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 2.855 2.589 Internal rate of return 15 % 20 % 3. The net present value, present value index, and internal rate of return all indicate that the biofuel equipment is/are a better financial opportunity compared to the wind turbines although both investments meet the minimum retum criterion of 10%. Feedback Check My Work 1a. For each project, multiply the annual net cash flow by the present value of an annuity factor for 4 periods at 10% {Refer Exhibit 5 in the text.). Subtract the amount to be invested. 16. Divide the total present value of the net cash flow by the amount to be invested 2. Divide the amount to be invested by the annual net cash flow. In Exhibit 5 find the discount rate that is associated with this factor at four years, 3. Consider why the internal rate of retum helps in comparing projects
