The management of Genco Utilities Inc. is considering two capital investment projects. The estimated net cash flows from each project are as follows:
|
|
|
Distribution |
|
Year |
Generating Unit |
Network Expansion |
|
1 |
$650,000 |
$180,000 |
|
2 |
650,000 |
180,000 |
|
3 |
650,000 |
180,000 |
|
4 |
650,000 |
180,000 |
The generating unit requires an investment of $2,060,500, while the distribution network expansion requires an investment of $546,660. 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.
2. Determine the internal rate of return for each project by (a) computing a present value factor for an annuity of $1 and (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?