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   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   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 $ $ 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 Wind Turbines   Biofuel Equipment   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       %       %

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
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Chapter1: Investments: Background And Issues
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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

  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

 

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

$

$

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

Wind Turbines

 

Biofuel Equipment

 

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

      %

      %

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