The management of Advanced Alternative Power Inc. is considering two capital investment projects. The estimated net cash flows from each project are as follows: Biofuel Equipment Wind Year Turbines 1 2 3 4 Year 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. Present Value of an Annuity of $1 at Compound Interest 6% 12% 0.943 0.893 1.833 1.690 2.673 2.402 3.465 3.037 4.212 3.605 4.917 4.111 5.582 4.564 6.210 4.968 6.802 7.360 1 2 3 4 5 6 7 8 $180,000 180,000 180,000 180,000 9 10 $360,000 360,000 360,000 360,000 10% 0.909 1.736 2.487 3.170 3.791 4.355 4.868 5.335 5.759 6.145 5.328 5.650 15% 0.870 1.626 2.283 2.855 3.353 3.785 4.160 4.487 4.772 5.019 20% 0.833 1.528 2.106 2.589 2.991 3.326 3.605 3.837 4.031 4.192
The management of Advanced Alternative Power Inc. is considering two capital investment projects. The estimated net cash flows from each project are as follows: Biofuel Equipment Wind Year Turbines 1 2 3 4 Year 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. Present Value of an Annuity of $1 at Compound Interest 6% 12% 0.943 0.893 1.833 1.690 2.673 2.402 3.465 3.037 4.212 3.605 4.917 4.111 5.582 4.564 6.210 4.968 6.802 7.360 1 2 3 4 5 6 7 8 $180,000 180,000 180,000 180,000 9 10 $360,000 360,000 360,000 360,000 10% 0.909 1.736 2.487 3.170 3.791 4.355 4.868 5.335 5.759 6.145 5.328 5.650 15% 0.870 1.626 2.283 2.855 3.353 3.785 4.160 4.487 4.772 5.019 20% 0.833 1.528 2.106 2.589 2.991 3.326 3.605 3.837 4.031 4.192
Managerial Accounting
15th Edition
ISBN:9781337912020
Author:Carl Warren, Ph.d. Cma William B. Tayler
Publisher:Carl Warren, Ph.d. Cma William B. Tayler
Chapter12: Capital Investment Analysis
Section: Chapter Questions
Problem 4PA: Net present value method, internal rate of return method, and analysis for a service company The...
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Transcribed Image Text: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:
Biofuel
Equipment
Year
1
2
3
4
Year
1
2
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.
Present Value of an Annuity of $1 at Compound Interest
12%
0.893
1.690
2.402
3.037
3.605
3
4
5
Wind
Turbines
6
7
8
9
10
Required:
$180,000
180,000
180,000
180,000
6%
0.943
1.833
2.673
3.465
4.212
4.917
5.582
6.210
6.802
7.360
10%
0.909
1.736
2.487
3.170
3.791
4.355
4.868
5.335
$360,000
360,000
360,000
360,000
5.759
6.145
4.111
4.564
4.968
5.328
5.650
15%
0.870
1.626
2.283
2.855
3.353
3.785
4.160
4.487
4.772
5.019
20%
0.833
1.528
2.106
2.589
2.991
3.326
3.605
3.837
4.031
4.192
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.
Transcribed Image Text:Present value of annual net cash flows
Less amount to be invested
Net present value
Wind Turbines Biofuel Equipment
$
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
3. The net present value, present value index, and internal rate of return all indicate that the
return criterion of 10%.
%
%
is/are better financial opportunity compared to the
although both investments meet the minimum
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