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:
Year
Wind Turbines
Biofuel Equipment
1
$280,000
$300,000
2
280,000
300,000
3
4
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 Interest
6%
10%
12%
15%
20%
0.943
0.909
0.893
0.870
0.833
1.833
1.736
1.690
1.626
1.528
2.673
2.487
2.402
2.283
2.106
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
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
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.
Present value of annual net cash flows
$
Less amount to be invested
Net present value
Compute a present value index for each project. If required, round your answers to two decimal places.
Present Value Index
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.
Present value factor for an annuity of $1
Internal rate of return
%
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