Question

Net Present Value Method, Internal Rate of Return Method, and Analysis

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	$330,000		$690,000
2	330,000		690,000
3	330,000		690,000
4	330,000		690,000

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	3.352	2.991
6	4.917	4.355	4.111	3.784	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

The wind turbines require an investment of $942,150, while the biofuel equipment requires an investment of $1,786,410. No residual value is expected from either project.

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 WIND TURBINES / BIOFUEL EQUIPMENT is a better financial opportunity compared to the WIND TURBINES / BIOFUEL EQUIPMENT, although both investments meet the minimum return criterion of 10%.

Answer 1

1a
	Wind Turbines	Biofuel Equipment
Present value of annual net cash flows	1046100	2187300
Less amount to be invested	942150	1786410
Net present value	103950	400890
1b
	Present Value Index
Wind Turbines	1.11	=1046100/942150
Biofuel Equipment	1.22	=2187300/1786410
2
	Wind Turbines	Biofuel Equipment
Present value factor for an annuity of $1	2.855	2.589
Internal rate of return	15%	20%
3
The net present value, present value index, and internal rate of return all indicate that the BIOFUEL EQUIPMENT is a better financial opportunity compared to the WIND TURBINES , although both investments meet the minimum return criterion of 10%.
Workings:
	Wind Turbines	Biofuel Equipment
Present value of annual net cash flows	=330000*3.170	=690000*3.170
	Wind Turbines	Biofuel Equipment
Present value factor for an annuity of $1	=942150/330000	=1786410/690000