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 $160,000 $320,000 2 160,000 320,000 3 160,000 320,000 4 160,000 320,000 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 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 | $160,000 | $320,000 | ||
| 2 | 160,000 | 320,000 | ||
| 3 | 160,000 | 320,000 | ||
| 4 | 160,000 | 320,000 |
| 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 $456,800, while the biofuel equipment requires an investment of $971,840. No residual value is expected from either project.
Required:
1a. Compute the
| 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
| 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 a better financial opportunity compared to the
, although both investments meet the minimum return criterion of 10%.
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