Chapter 11, Problem 4PA

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:

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.

Instructions

1. 1. Compute the following for each project:
   1. A. The net present value. Use a rate of 6% and the present value of an annuity table appearing in Exhibit 5 of this chapter.
   2. B. A present value index. (Round to two decimal places.)
2. 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 table appearing in Exhibit 5 of this chapter.
3. 3. What advantage does the internal rate of return method have over the net present value method in comparing projects?