Reference no: EM132690536
Problem - Net present value method, internal rate of return method, and analysis
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 table appearing in this chapter.
b. A present value index. Round to two decimal places.
2a. Determine the internal rate of return for each project by (a) computing a present value factor for an annuity of $1.
2b. Determine the internal rate of return for each project by (b) using the present value of an annuity of $1 table appearing in this chapter.
3. What advantage does the internal rate of return method have over the net present value method in comparing projects?