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 Required: 1a. 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 $fill in the blank 1 $fill in the blank 2 Less amount to be invested fill in the blank 3 fill in the blank 4 Net present value $fill in the blank 5 $fill in the blank 6 1b. Compute a present value index for each project. If required, round your answers to two decimal places. Present Value Index Wind Turbines fill in the blank 7 Biofuel Equipment fill in the blank 8

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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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

Required:

1a. 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	$fill in the blank 1	$fill in the blank 2
Less amount to be invested	fill in the blank 3	fill in the blank 4
Net present value	$fill in the blank 5	$fill in the blank 6

1b. Compute a present value index for each project. If required, round your answers to two decimal places.

	Present Value Index
Wind Turbines	fill in the blank 7
Biofuel Equipment	fill in the blank 8

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	fill in the blank 9	fill in the blank 10
Internal rate of return	fill in the blank 11 %	fill in the blank 12 %

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 6%.

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