# The management of Pacific Utilities Inc. is considering two capital - 13485

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## yousafbhutta

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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.

Instructions:

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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