Daryl Kearns saved $240,000 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 investing his savings wisely and is currently considering two investment opportunities. Both investments require an initial payment of $189,500. The following table presents the estimated cash inflows for the two alternatives: Opportunity #1 Opportunity #2 Year 1 $ 55,630 104,300 Year 2 $ 58,910 108,950 Year 3 $78,770 16,800 Year 4 $101,330 14,900 Mr. Kearns decides to use his past average return on mutual fund investments as the discount rate; it is 9 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 project. Which should Mr. Kearns adopt based on the payback approach?
Daryl Kearns saved $240,000 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 investing his savings wisely and is currently considering two investment opportunities. Both investments require an initial payment of $189,500. The following table presents the estimated cash inflows for the two alternatives: Opportunity #1 Opportunity #2 Year 1 $ 55,630 104,300 Year 2 $ 58,910 108,950 Year 3 $78,770 16,800 Year 4 $101,330 14,900 Mr. Kearns decides to use his past average return on mutual fund investments as the discount rate; it is 9 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 project. 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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Transcribed Image Text:Daryl Kearns saved $240,000 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 investing his
savings wisely and is currently considering two investment opportunities. Both investments require an initial payment of $189,500. The
following table presents the estimated cash inflows for the two alternatives:
Opportunity #1
Opportunity #2
Year 1
$ 55,630
104,300
Year 2
$ 58,910
108,950
Year 3
$78,770
16,800
Mr. Kearns decides to use his past average return on mutual fund investments as the discount rate; it is 9 percent. (PV of $1 and PVA of
$1) (Use appropriate factor(s) from the tables provided.)
Required
Required A Required B
Year 4
$101,330
14,900
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 project. Which should Mr. Kearns adopt based on the payback approach?
Complete this question by entering your answers in the tabs below.
Opportunity 1
Opportunity 2
Which opportunity should be chosen?
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
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