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.
Required:
1a. Compute the net present value for each project. Use a rate of 6% and the present value of an annuity of $1 in above table. If required, round to the nearest dollar.
1b. Compute a present value index for each project. If required, round your answers 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 in above table. If required, round your present value factor answers to three decimal places and internal rate of return to the nearest percent.
3. What advantage does the internal rate of return method have over the net present value method in comparing projects?