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PR25-4A Pacific

Price: $3.50

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 Unite Dis. 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.

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
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

3. What advantage does the internal rate of return method have over the net
present value method in comparing projects?

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