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The management of Mid South 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 | 580,000 | 210,000 |

2 | 580,000 | 210,000 |

3 | 580,000 | 210,000 |

4 | 580,000 | 210,000 |

The generating unit requires an investment of $1,761,460, while the distribution

network expansion requires an investment of $665,700. 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?

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