12-3 Range Corporation has deeded to invest in renewable energy sources to meet

Question

12-3

Range Corporation has deeded 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 $51,380 $133850 Initial investment $38300 $104200 Determine the net present value and profitability index of each project. (If the not 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 purpose, 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 energy source.

Explanation / Answer

when there is a tie between two tools of capital budgeting then we make decision on the basis of NPV

sO since NPV of "Wind"energy is higher ,it should be selected

solar Wind NPV = Present value -Initial investment 51380-38300   =13080 133850-104200 = 29650 PI =Present value /Initial investment 51380/38300 = 1.34 133850/104200 = 1.28

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