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Net Present Value Method, Internal Rate of Return Method, and Analysis

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 Equipment1 $280,000 $300,0002 280,000 300,0003 280,000 300,0004 280,000 300,000

The wind turbines require an investment of $887,600, while the biofuel equipment requires an investment of $911,100. 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 6% and the present value of an annuity of $1 in the table above. If required, round to the nearest dollar.

Wind TurbinesBio Fuel EquipmentPresent value of annual net cash flows$fill in the blank 1$fill in the blank 2Less amount to be invested$fill in the blank 3$fill 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.

Present Value IndexWind Turbinesfill in the blank 7Bio Fuel Equipmentfill in the blank 8

2. Determine the internal rate of return for each project by (a) computing a present value factor for an annuityof $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 percent.

Wind TurbinesBio Fuel 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.. is/are a better financial opportunity compared to the ,although both investments meet the minimum return criterion of 6%.

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