Year Wind Turbines Biofuel Equipment 1 $280,000 $300,000 2 |280,000 300,000 3 280.000 300.000 4 280.000 300,000
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. Compute the following for each project:
a. The net present value. Use a rate of 6% and the present value of an
annuity of $1 table appearing in this chapter (Exhibit 5).
b. A present value index. Round to two decimal places.
2. Determine the internal rate of return for each projectby (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 this chapter (Exhibit 5).
3. What advantage does the internal rate of return method have over then
net present value method in comparing projects ?
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