Daryl Kearns saved $220,000 during the 25 years that he worked for a major corporation. Now he has retired at the age of 50 and has begun to draw a comfortable pension check every month. He wants to ensure the financial security of his retirement by investing his savings wisely and is currently considering two investment opportunities. Both investments require an initial payment of $190,000. The following table presents the estimated cash inflows for the two alternatives: Year 2 $ 58,930 109,700 Year 1 Year 3 Year 4 $ 55,670 Opportunity #1 Opportunity #2 $101,400 15,200 $78,750 104,000 18,200 Mr. Kearns decides to use his past average return on mutual fund investments as the discount rate; it is 10 percent. (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.) Required a. Compute the net present value of each opportunity. Which should Mr. Kearns adopt based on the net present value approach? b. Compute the payback period for each opportunity. Which should Mr. Kearns adopt based on the payback approach?
Daryl Kearns saved $220,000 during the 25 years that he worked for a major corporation. Now he has retired at the age of 50 and has begun to draw a comfortable pension check every month. He wants to ensure the financial security of his retirement by investing his savings wisely and is currently considering two investment opportunities. Both investments require an initial payment of $190,000. The following table presents the estimated cash inflows for the two alternatives: Year 2 $ 58,930 109,700 Year 1 Year 3 Year 4 $ 55,670 Opportunity #1 Opportunity #2 $101,400 15,200 $78,750 104,000 18,200 Mr. Kearns decides to use his past average return on mutual fund investments as the discount rate; it is 10 percent. (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.) Required a. Compute the net present value of each opportunity. Which should Mr. Kearns adopt based on the net present value approach? b. Compute the payback period for each opportunity. Which should Mr. Kearns adopt based on the payback approach?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
Transcribed Image Text:Daryl Kearns saved $220,000 during the 25 years that he worked for a major corporation. Now he has retired at the age of 50 and has
begun to draw a comfortable pension check every month. He wants to ensure the financial security of his retirement by investing his
savings wisely and is currently considering two investment opportunities. Both investments require an initial payment of $190,000. The
following table presents the estimated cash inflows for the two alternatives:
Year 1
$ 55,670
104,000
Year 2
Year 3
Year 4
Opportunity #1
Opportunity #2
$ 58,930
109,700
$78,750
18,200
$101,400
15,200
Mr. Kearns decides to use his past average return on mutual fund investments as the discount rate; it is 10 percent. (PV of $1 and PVA
of $1) (Use appropriate factor(s) from the tables provided.)
Required
a. Compute the net present value of each opportunity. Which should Mr. Kearns adopt based on the net present value approach?
Compute the payback period for each opportunity. Which should Mr. Kearns adopt based on the payback approach?
Complete this question by entering your answers in the tabs below.
Required A
Required B
Compute the net present value of each opportunity. Which should Mr. Kearns adopt based on the net present value
approach? (Round your intermediate calculations and final answer to two decimal places.)
Net Present Value
Opportunity 1
Opportunity 2
Which opportunity should be chosen?
< Required A
Required B >
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