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 |
280,000 |
300,000 |
4 |
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 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 6% and the present value of an annuity of $1 in the table above. If required, round to the nearest dollar.
|
Wind Turbines
|
Biofuel Equipment
|
Present value of annual net cash flows |
$fill in the blank 1 |
$fill in the blank 2 |
Less amount to be invested |
fill in the blank 3 |
fill in the blank 4 |
Net 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 Index
|
Wind Turbines |
fill in the blank 7 |
Biofuel Equipment |
fill in the blank 8 |
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 |
fill in the blank 9 |
fill in the blank 10 |
Internal rate of return |
fill 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%.