Write a memorandum discussing the usefulness of capital investment techniques, accounting assignment

Case Summary

Write a memorandum discussing the usefulness of capital investment techniques (net present value, internal rate of return, payback, and unadjusted rate of return). Address the strengths and weaknesses of the methods and the advantages of techniques using time value of money.

Case Analysis

The management of Southern Power and Light is considering two capital investment projects.  The estimated net cash flows fro each project are as follows:

Year

Wind Turbines

   Biofuel Equipment

1

320,000

   350,000

2

320,000

  350,000

3

320,000

  350,000

4

320,000

   350,000

The wind turbines require an investment of 971,840, while the biofuel equipment requires an investment of 1,109,500.  No residual value is expected from either project. Use a rate of 6% for all calculations.

Compute the net present value of each project.

Compute the internal rate of return for each project.

Executive Decisions

Indicate which project would be selected if the net present value is used. Indicate which project would be selected if the internal rate of return is used. Indicate which criteria you would suggest using and why.