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:

YearWind TurbinesBiofuel Equipment1$180,000$320,0002180,000320,0003180,000320,0004180,000320,000

The wind turbines require an investment of $466,020, while the biofuel equipment requires an investment of $913,600. No residual value is expected from either project.

Year6%10%12%15%20%10.9430.9090.8930.8700.83321.8331.7361.6901.6261.52832.6732.4872.4022.2832.10643.4653.1703.0372.8552.58954.2123.7913.6053.3532.99164.9174.3554.1113.7853.32675.5824.8684.5644.1603.60586.2105.3354.9684.4873.83796.8025.7595.3284.7724.031107.3606.1455.6505.0194.192

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.

Line Item DescriptionWind TurbinesBiofuel EquipmentPresent value of annual net cash flows$fill in the blank 1$fill in the blank 2Amount to be investedfill in the blank 3fill in the blank 4Net 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.

ProjectPresent Value IndexWind Turbinesfill in the blank 7Biofuel Equipmentfill 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 DescriptionWind TurbinesBiofuel EquipmentPresent value factor for an annuity of $1fill in the blank 9fill in the blank 10Internal rate of returnfill 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

biofuel equipmentwind turbines

is/are a better financial opportunity compared to the

biofuel equipmentwind turbines

, although both investments meet the minimum return criterion of 10%.