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$210,000$440,0002210,000440,0003210,000440,0004210,000440,000

The wind turbines require an investment of $599,550, while the biofuel equipment requires an investment of $1,336,280. No residual value is expected from either project.

Present Value of an Annuity of $1 at Compound InterestYear6%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 thepresent value of an annuityof $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 TurbinesBiofuel EquipmentPresent value of annual net cash flows$fill in the blank 1

$fill in the blank 2

Less amount to be investedfill in the blank 3

fill in the blank 4

Net present value$fill in the blank 5

$fill in the blank 6

1b.Compute apresent value indexfor each project. If required, round your answers to two decimal places.

Present Value IndexWind Turbinesfill in the blank 7

Biofuel Equipmentfill in the blank 8

2.Determine the internal rate of return for each project by (a) computing a present value factor for anannuityof $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 TurbinesBiofuel EquipmentPresent value factor for an annuity of $1fill in the blank 9

fill in the blank 10

Internal 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

is/are a better financial opportunity compared to the

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