Question

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: Wind Biofuel Year Turbines Equipment $180,000 $360,000 180,000 360,000 180,000 360,000 180,000 360,000 The wind turbines require an investment of $513,900, while the biofuel equipment requires an investment of $1,093,320. No residual value is expected from either project.

Answer 1

					wind Turbines		Biofuel Equipments
present value of annual net cash flow					570420		1140840
Less: amount to be invested					-513900		-1093320
net present value					56520		47520
Notes
wind Turbines					Biofuel Equipments
	calculation of PV of cash flow					calculation of PV of cash flow
year	cash flow	Pv value of annuity(10%)	flows		year	cash flow	Pv value of annuity(10%)	flows
0	-513900	1	-513900		0	-1093320	1	-1093320
1	180000	0.909	163620		1	360000	0.909	327240
2	180000	0.826	148680		2	360000	0.826	297360
3	180000	0.751	135180		3	360000	0.751	270360
4	180000	0.683	122940		4	360000	0.683	245880
total			570420		total			1140840
compute PV index
Pv index= ( PV of future cash flow/Initial investment)
wind Turbines		1.109982
Biofuel Equipments		1.043464

1- (1+ г) -" Anпuity PV Factor т = rate per period пиmber of periods т п

180000*(1+.10)4-1/.10) = 835380

360000*(1+.10)4-1/.10) = 1670760

Σ CFi IRR = 0 (1 IRR) i 0

					wind Turbines		Biofuel Equipments
Present value factor for an annuity of 1$					8,35,380.00		16,70,760.00
IRR					34.12		15.64

3.the NPV , Pi Index & IRR indicates that wind turbines is better financial opportunity compared to biofuel equipment , although both investment meet the minimum return criteria of 10%