Ranger Corporation has decided to invest in renewable energy sources to meet par
ID: 2497557 • Letter: R
Question
Ranger Corporation has decided to invest in renewable energy sources to meet part of its energy needs for production. It is considering solar power versus wind power. After considering cost savings as well as incremental revenues from selling excess electricity into the power grid, it has determined the following. Click here to view PV table.
Solar Wind
Present value of annual cash flows $54,180 $128,900
Initial investment $39,400 $105,200
Determine the net present value and profitability index of each project. (If the net present value is negative, use either a negative sign preceding the number eg -45 or parentheses eg (45). Round present value answers to 0 decimal places, e.g. 125 and profitability index answers to 2 decimal places, e.g. 15.25. For calculation purposes, use 5 decimal places as displayed in the factor table provided.)
Solar Wind
Net present value $ $
Profitability index
Which energy source should it choose?
The company should choose
wind
solar
energy source.
Explanation / Answer
Present value of annual cash flows $54,180 $128,900
Initial investment $39,400 $105,200
Solar NPV= 54,180-39,400=14780
Wind NPV=128,900-105,200=23700
Solar Profitability Index=54,180/39,400=1.38
Wind Profitability Index=128,900/105,200=1.23
Project having higher NPV has to be choosen . So WIND energy has to be choosen
Net Present Value (NPV) vs. Profitability Index (PI)
Profitability index is a ratio between the discounted cash inflow to the initial cash outflow. It presents a value which says how many times of the investment is the returns in the form of discounted cash flows.
The disadvantage associated with this method again is its relativity. A project can have same profitability index with different investments and vast difference in absolute dollar return. NPV has an upper hand in this case.
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