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 PY table Solar Wind $132,950 Present value of annual cash flows Initial investment $52,380 $38,000 $104,300 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 s Profitability index Which energy source should it choose? The com pany should choose energy source.

Answer 1

Answer
				Solar	Wind
		Present value of annual cash flows		52380	132950
		Initial investment		38000	104300
	Net Present Value (NPV) =	PV of annual cash flow - Initial investment		14380	28650
	Profitability Index (PI)      =	PV of annual cash flow / Initial investment		1.378421	1.274688
	The company should use Wind Energy because NPV is higher in wind Energy. NPV is the best measure of investment evaluation compared to Profitability Index.

Answer 2