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 | $160,000 | $340,000 | ||
2 | 160,000 | 340,000 | ||
3 | 160,000 | 340,000 | ||
4 | 160,000 | 340,000 |
The wind turbines require an investment of $485,920, while the biofuel equipment requires an investment of $970,700. 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 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 | $ | $ |
Less amount to be invested | ||
Net present value | $ | $ |
1b. Compute a present value index for each project. If required, round your answers to two decimal places.
Present Value Index | |
Wind Turbines | |
Biofuel Equipment |
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 | ||||
Internal rate of return | % | % |
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 | $160000*3.17 = 507200 | $340000*3.17 = 1077800 |
Less amount to be invested | -485920 | -970700 |
Net present value | $21280 | $107100 |
1b. Compute a present value index for each project. If required, round your answers to two decimal places.
Present Value Index | |
Wind Turbines | 507200/485920 = 1.04 |
Biofuel Equipment | 1077800/970700 = 1.11 |
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 | 485920/160000 = 3.037 | 970700/340000 = 2.855 | ||
Internal rate of return | 12 | % | 15 | % |
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