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(Solved): Net Present Value Method, Internal Rate of Return Method, and Analysis The management of Advanced ...
Net Present Value Method, Internal Rate of Return Method, and Analysis The management of Advanced Alternative Power Inc. is considering two capital investment projects. The estimated net cash flows from each project are as follows: Present Value of an Annuity of at
Required: 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 places and internal rate of return to the nearest whole percent. Wind Biofuel Turbines Equipment Present value factor for an annuity of Internal rate of return 3. The net present value, present value index, and internal rate of return all indicate that the is a better financial opportunity compared to the - although both investments meet the minimum return criterion of .
Expert Answer
To solve the given problem, we'll use the Net Present Value (NPV) method, Present Value Index (PVI), and Internal Rate of Return (IRR). Let's calculate the values for each project based on the provided information.1a. Net Present Value (NPV) Calculation For the Wind Turbines project Year 1: -$690,000 * 0.870 = -$600,300 Year 2: $330,000 * 1.626 = $536,580 Year 3: $690,000 * 2.283 = $1,575,270 Year 4: $690,000 * 2.855 = $1,970,950 Year 5: $690,000 * 3.352 = $2,313,120 Year 6: $690,000 * 3.784 = $2,611,760NPV = Sum of Present Values - Investment NPV = (-$600,300) + $536,580 + $1,575,270 + $1,970,950 + $2,313,120 + $2,611,760 - $942,150 NPV = $8,464,530 - $942,150 NPV = $7,522,380For the Biofuel Equipment project: Year 1: -$690,000 * 0.833 = -$574,770 Year 2: -$690,000 * 1.528 = -$1,055,520 Year 3: -$690,000 * 2.106 = -$1,451,740 Year 4: -$690,000 * 2.589 = -$1,783,410 Year 5: -$690,000 * 2.991 = -$2,062,590 Year 6: -$690,000 * 3.326 = -$2,296,140NPV = Sum of Present Values - Investment NPV = (-$574,770) + (-$1,055,520) + (-$1,451,740) + (-$1,783,410) + (-$2,062,590) + (-$2,296,140) - $2,095,530 NPV = -$9,224,170 - $2,095,530 NPV = -$11,319,7001b. Present Value Index (PVI) Calculation:PVI = NPV / InvestmentFor the Wind Turbines project: PVI = $7,522,380 / $942,150 PVI ? 7.99For the Biofuel Equipment project: PVI = -$11,319,700 / $2,095,530 PVI ? -5.40Net Present Value (NPV):Wind Turbines project: The NPV is $7,522,380, indicating a positive value. This means that the project is expected to generate more value than the initial investment.Biofuel Equipment project: The NPV is -$11,319,700, indicating a negative value. This means that the project is not expected to generate enough value to cover the initial investment.