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:
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 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.

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:
a. Compute the net present value for each project. Use a rate of 6% and the present value of an annuity of $1 in the table above. If required, round to the nearest dollar.
b. Compute a present value index for each project.
c. 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 percent.

Answer 1

Answer:

A. Wind Turbines  = $82,629.57

Biofuel Equipment = $128,431.68

B. Wind Turbines  = 1 + ($82,629.57 /  $887,600) = 1.093

Biofuel Equipment = 1 + ($128,431.68 / $911,100) = 1.141

C. Wind Turbines  = 10%

Biofuel Equipment = 12%

Explanation:

Net present value is the present value of after tax cash flows from an investment less the amount invested.  

Internal rate of return is the discount rate that equates the after tax cash flows from an investment to the amount invested

NPV and IRR can be calculated using a financial calculator  

Wind Turbines

Cash flow in year 0 = $-887,600,

Cash flow each year from year 1 to 4 = $280,000

I = 6%

NPV = $82,629.57

IRR = 10%

Biofuel Equipment

Cash flow in year 0 =  $-911,100

Cash flow each year from year 1 to 4 = $300,000

I = 6%

NPV = $128,431.68

IRR = 12%

present value index = 1 + (NPV / Initial investment)

Wind Turbines  = 1 + ($82,629.57 /  $887,600) = 1.093

Biofuel Equipment = 1 + ($128,431.68 / $911,100) = 1.141

To find the NPV using a financial calculator:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. after inputting all the cash flows, press the NPV button, input the value for I, press enter and the arrow facing a downward direction.  

3. Press compute  

To find the IRR using a financial calculator:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. After inputting all the cash flows, press the IRR button and then press the compute button