Question
In: Accounting
Net Present Value Method, Internal Rate of Return Method, and Analysis for a Service Company The...
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 | $390,000 | $740,000 | ||
| 2 | 390,000 | 740,000 | ||
| 3 | 390,000 | 740,000 | ||
| 4 | 390,000 | 740,000 |
The wind turbines require an investment of $1,184,430, while the biofuel equipment requires an investment of $2,112,700. 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 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.
| Wind Turbines | Biofuel Equipment | |
| Present value of annual net cash flows | $ | $ |
| Less amount to be invested | ||
| Net present value | $ | $ |
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 is/are a better financial opportunity compared to the , although both investments meet the minimum return criterion of 10%.
Solutions
ekkarill92 answered 2 years agoRelated Solutions
Net Present Value Method, Internal Rate of Return Method, and Analysis for a Service Company The...
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
$180,000
$360,000
2
180,000
360,000
3
180,000
360,000
4
180,000
360,000
The wind turbines require an investment of $466,020, while the
biofuel equipment requires an investment of $1,027,800. No residual
value is expected from either...
Net Present Value Method, Internal Rate of Return Method, and Analysis for a Service Company The...
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
$390,000
$740,000
2
390,000
740,000
3
390,000
740,000
4
390,000
740,000
The wind turbines require an investment of $1,184,430, while the
biofuel equipment requires an investment of $2,112,700. No residual
value is expected from either...
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Year
After Hours
Sun Fun
1
$320,000
$290,000
2
320,000
290,000
3
320,000
290,000
4
320,000
290,000
After Hours requires an investment of $913,600, while
Sun Fun requires an investment of $880,730. No residual
value is expected from either project.
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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 $420,000 $800,000
2 420,000 800,000
3 420,000 800,000
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The wind turbines require an investment of $1,275,540, while the
biofuel equipment requires an investment of $2,284,000. No residual
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The capital investment committee of Arches Landscaping Company
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follows:
Front-End Loader
Greenhouse
Year
Income from
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Net Cash
Flow
Income from
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Net Cash
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1
$65,100
$209,000
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65,100
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282,000
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52,000
199,000
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The capital investment committee of Arches Landscaping Company
is considering two capital investments. The estimated operating
income and net cash flows from each investment are as follows:
Front-End Loader
Greenhouse
Year
Operating
Income
Net Cash
Flow
Operating
Income
Net Cash
Flow
1
$54,600
$164,000
$115,000
$262,000
2
54,600
164,000
87,000
221,000
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164,000
44,000
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Average Rate of Return Method, Net Present Value Method, and Analysis for a service company The...
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Analysis for a service company
The capital investment committee of Arches Landscaping Company
is considering two capital investments. The estimated income from
operations and net cash flows from each investment are as
follows:
Front-End Loader
Greenhouse
Year
Income from
Operations
Net Cash
Flow
Income from
Operations
Net Cash
Flow
1
$36,100
$112,000
$76,000
$179,000
2
36,100
112,000
58,000
151,000
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36,100
112,000
29,000
106,000
4
36,100
112,000
13,000
73,000
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Average Rate of Return Method, Net Present Value Method, and Analysis for a service company The...
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Analysis for a service company
The capital investment committee of Arches Landscaping Company
is considering two capital investments. The estimated operating
income and net cash flows from each investment are as follows:
Front-End Loader
Greenhouse
Year
Operating
Income
Net Cash
Flow
Operating
Income
Net Cash
Flow
1
$44,000
$139,000
$92,000
$222,000
2
44,000
139,000
70,000
188,000
3
44,000
139,000
35,000
132,000
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139,000
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90,000
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Average Rate of Return Method, Net Present Value Method, and Analysis for a service company The...
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is considering two capital investments. The estimated income from
operations and net cash flows from each investment are as
follows:
Front-End Loader
Greenhouse
Year
Income from
Operations
Net Cash
Flow
Income from
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Net Cash
Flow
1
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120,000
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162,000
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120,000
32,000
114,000
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40,000
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78,000
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Average Rate of Return Method, Net Present Value Method, and Analysis for a service company The...
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is considering two capital investments. The estimated operating
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Greenhouse
Year
Operating
Income
Net Cash
Flow
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Income
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Flow
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$59,400
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59,400
181,000
21,000
118,000
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59,400
181,000
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