The generating unit requires an investment of $1,172,900, while the distribution

Question

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?

Present Value of an Annuity of $1 at Compound Interest Year 6% 10% 12% 15% 20% 1 0.943 0.909 0.893 0.870 0.833 2 1.833 1.736 1.690 1.626 1.528 3 2.673 2.487 2.402 2.283 2.106 4 3.465 3.170 3.037 2.855 2.589 5 4.212 3.791 3.605 3.353 2.991 6 4.917 4.355 4.111 3.785 3.326 7 5.582 4.868 4.564 4.160 3.605 8 6.210 5.335 4.968 4.487 3.837 9 6.802 5.759 5.328 4.772 4.031 10 7.360 6.145 5.650 5.019 4.192

Explanation / Answer

The internal rate of return is a rate quantity, it is an indicator of the efficiency, quality, or yield of an investment. This is in dissimilarity with the net present value, which indicates the value or magnitude of an investment.

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