Question

In: Accounting

Net Present Value Method, Internal Rate of Return Method, and Analysis The management of Advanced Alternative...

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%.

Solutions

Expert Solution

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

Related Solutions

Net Present Value Method, Internal Rate of Return Method, and Analysis The management of Advanced Alternative...
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 $250,000   $530,000   2 250,000   530,000   3 250,000   530,000   4 250,000   530,000   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...
Net Present Value Method, Internal Rate of Return Method, and Analysis The management of Quest Media...
Net Present Value Method, Internal Rate of Return Method, and Analysis The management of Quest Media Inc. is considering two capital investment projects. The estimated net cash flows from each project are as follows: Year Radio Station TV Station 1 $270,000 $490,000 2 270,000 490,000 3 270,000 490,000 4 270,000 490,000 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...
Net Present Value Method, Internal Rate of Return Method, and Analysis The management of Quest Media...
Net Present Value Method, Internal Rate of Return Method, and Analysis The management of Quest Media Inc. is considering two capital investment projects. The estimated net cash flows from each project are as follows: Year Radio Station TV Station 1 $320,000 $610,000 2 320,000 610,000 3 320,000 610,000 4 320,000 610,000 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...
Net Present Value Method, Internal Rate of Return Method, and Analysis The management of Quest Media...
Net Present Value Method, Internal Rate of Return Method, and Analysis The management of Quest Media Inc. is considering two capital investment projects. The estimated net cash flows from each project are as follows: Year Radio Station TV Station 1 $340,000 $710,000 2 340,000 710,000 3 340,000 710,000 4 340,000 710,000 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...
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...
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...
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 Style Networks Inc. is considering two TV show projects. The estimated net cash flows from each project are as follows: 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. Present Value...
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 $420,000 $800,000 2 420,000 800,000 3 420,000 800,000 4 420,000 800,000 The wind turbines require an investment of $1,275,540, while the biofuel equipment requires an investment of $2,284,000. No residual value is expected from either...
Internal rate of return and net present value are related in that: Internal rate of return...
Internal rate of return and net present value are related in that: Internal rate of return formed the basis for the eventual development of the net present value theory. Internal rate of return finds a discount rate that produces a net present value of zero. Net present value formed the basis for the eventual development of the internal rate of return theory. Net present value can only be used to evaluate irregular cash flows, whereas internal rate of return can...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT