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 $500,000 2 280,000 500,000 3 280,000 500,000 4 280,000 500,000 The wind turbines require an investment of $850,360, while the biofuel equipment requires an investment of $1,427,500. 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 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 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 %

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 $500,000 2 280,000 500,000 3 280,000 500,000 4 280,000 500,000 The wind turbines require an investment of $850,360, while the biofuel equipment requires an investment of $1,427,500. 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 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 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 %

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	$500,000
2	280,000	500,000
3	280,000	500,000
4	280,000	500,000

The wind turbines require an investment of $850,360, while the biofuel equipment requires an investment of $1,427,500. 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 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
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	%

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:
Wind
Biofuel
Year
Turbines
Equipment
1.
$280,000
$500,000
280,000
500,000
3
280,000
500,000
4
280,000
500,000
The wind turbines require an investment of $850,360, while the biofuel equipment requires an investment of $1,427,500. 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
5
4.212
3.791
3.605
3.353
2.991
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.
wind Turbines
Biofuel Equipment
Present value of annual net cash flows
$4
Less amount to be invested
Net present value
1b. Compute a present value index for each project. If required, round your answers to two decimal places.
Present Value Index
*-- ' .

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
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.
Wind Turbines
Biofuel Equipment
Present value of annual net cash flows
Less amount to be invested
Net present value
1b. Compute a present value index for each project. If required, round your answers to two decimal places.
Present Value Index
Wind Turbines
Biofuel Equipment
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
Internal rate of return
%
%
3. The net present value, present value index, and internal rate of return all indicate that the biofuel equipment
v is/are a better financial opportunity compared to the wind turbines
V, although both investments meet the
minimum return criterion of 10%.

Expert Solution

Step 1

Capital budgeting is a process which is used to evaluate a project in order to make a decision whether to go for the project or not. There are various tools which are used in the capital budgeting process such as net present value, internal rate of return, profitability index, payback period, etc.

The time value of money concept is used in most of the tools used in capital budgeting process. As per time value of money, the amount received at present time will have more worth than the same amount of money to be received at a future time.

The net present value (NPV) of a project is computed by subtracting the present value of cash outflow from the present value of cash inflow. If the NPV of a project is positive, it is good to be accepted as it will increase the worth of the entity.

If the NPV of the project is negative, the project is not expected to be selected. In case the NPV of a project is zero, the firm may or may not select a project.

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