The management of Pacific Utilities Inc. is considering two capital - 13486

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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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