Chapter 26, Problem 26.4APR

1. a.

To determine

Net present value method:

Net present value method is the method which is used to compare the initial cash outflow of investment with the present value of its cash inflows. In the net present value, the interest rate is desired by the business based on the net income from the investment, and it is also called as the discounted cash flow method.

Present value index:

Present value index is a technique, which is used to rank the proposals of the business.  It is used by the management when the business has more investment proposals, and limited fund.

The present value index is computed as follows:

$\text{Present value index =}\frac{\text{Total present value of net cash flow}}{\text{Amount to be invested}}$

Internal rate of return method:

Internal rate of return method is one of the capital investment method which determines the rate of return wherein the net present value of all the cash flows (both positive and negative) from an investment is zero. This method also called as the time-adjusted rate of return method, and it used to evaluate the different proposal’s expected rate of return.

To calculate: The net present value of the investment of Power Incorporation.

b.

To determine

To determine:  The present value index for each proposal.

2.

To determine

The internal rate of return for the given project

3.

To determine

To compare: The both projects, and discuss the advantages of internal rate of return over the net present value.