The management of Pacific Utilities Inc. is considering two capital investment projects. The estimated net cash flows from each project are as follows:
Year Generating Unit Distribution Network Expansion
1 370,000 280,000
2 370,000 280,000
3 370,000 280,000
4 370,000 280,000
The generating unit requires an investment of $1,172,900, while the distribution network expansion requires an investment of $850,360. No residual value is expected from either project.
1) Compute the following for each project
a. The net present value. Use a rate of 6% and the present value of an annuity of $1.00 in the table below.
b. A present value index. Round to two decimal places.
2) Determine the internal rate of return for each project by (a) computing a present value factor for an annuity of $1.00 and (b) using the present value of an annuity of $1 from the table below.
3) What advantage does the internal rate of return method have over the net present value method in comparing projects?
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