The management of Advanced Alternative Power Inc. is considering two capital investment projects. The estimated net cash flows from each project are as follows: Wind Biofuel Year Turbines Equipment 1 $270,000 $510,000 2 270,000 510,000 3 270,000 510,000 4 270,000 510,000 The wind turbines require an investment of $770,850, while the biofuel equipment requires an investment of $1,548,870. 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 1.833 1.736 1.690 1.626 1.528 2.673 2.487 2.402 2.283 2.106 3.465 3.170 3.037 2.855 2.589 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: la. 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.
The management of Advanced Alternative Power Inc. is considering two capital investment projects. The estimated net cash flows from each project are as follows: Wind Biofuel Year Turbines Equipment 1 $270,000 $510,000 2 270,000 510,000 3 270,000 510,000 4 270,000 510,000 The wind turbines require an investment of $770,850, while the biofuel equipment requires an investment of $1,548,870. 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 1.833 1.736 1.690 1.626 1.528 2.673 2.487 2.402 2.283 2.106 3.465 3.170 3.037 2.855 2.589 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: la. 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.
Chapter10: Capital Budgeting: Decision Criteria And Real Option
Section10.A: Mutually Exclusive Investments Having Unequal Lives
Problem 4P
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Question
![The management of Advanced Alternative Power Inc. is considering two capital investment projects. The estimated net
cash flows from each project are as follows:
Wind
Biofuel
Year
Turbines
Equipment
$270,000
$510,000
2
270,000
510,000
3
270,000
510,000
4
270,000
510,000
The wind turbines require an investment of $770,850, while the biofuel equipment requires an investment of
$1,548,870. 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
2.673
2.487
2.402
2.283
2.106
4
3.465
3.170
3.037
2.855
2.589
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
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:
la. 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
3.
co](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F7f410aec-1e26-46a2-a7b0-0c8d2f43b153%2F3bb19003-b455-4273-8af1-a29232c90c4c%2F2dq0h7j_processed.png&w=3840&q=75)
Transcribed Image Text:The management of Advanced Alternative Power Inc. is considering two capital investment projects. The estimated net
cash flows from each project are as follows:
Wind
Biofuel
Year
Turbines
Equipment
$270,000
$510,000
2
270,000
510,000
3
270,000
510,000
4
270,000
510,000
The wind turbines require an investment of $770,850, while the biofuel equipment requires an investment of
$1,548,870. 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
2.673
2.487
2.402
2.283
2.106
4
3.465
3.170
3.037
2.855
2.589
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
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:
la. 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
3.
co
![la. 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
855,900 v $
1,616,700
Present value of annual net cash flows
Less amount to be invested
819,990 x
1,456,050 x
Net present value
35,910 x s
160,650 x
1b. Compute a present value index for each project. If required, round your answers to two decimal places.
Present Value Index
Wind Turbines
1.04 X
Biofuel Equipment
1.11| х
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
3.037 х
2.855 X
Internal rate of return
12 х %
15 x %
3. The net present value, present value index, and internal rate of return all indicate that the wind turbines v
is/are a better financial opportunity compared to the biofuel equipment v , although both investments meet the
minimum return criterion of 10%.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F7f410aec-1e26-46a2-a7b0-0c8d2f43b153%2F3bb19003-b455-4273-8af1-a29232c90c4c%2Fq42sw3_processed.png&w=3840&q=75)
Transcribed Image Text:la. 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
855,900 v $
1,616,700
Present value of annual net cash flows
Less amount to be invested
819,990 x
1,456,050 x
Net present value
35,910 x s
160,650 x
1b. Compute a present value index for each project. If required, round your answers to two decimal places.
Present Value Index
Wind Turbines
1.04 X
Biofuel Equipment
1.11| х
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
3.037 х
2.855 X
Internal rate of return
12 х %
15 x %
3. The net present value, present value index, and internal rate of return all indicate that the wind turbines v
is/are a better financial opportunity compared to the biofuel equipment v , although both investments meet the
minimum return criterion of 10%.
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