Daryl Kearns saved $240,000 during the 30 years that he worked for a major corporation. Now he has retired at the age of 60 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 $160,000. The following table presents the estimated cash inflows for the two alternatives: Year 1 $44,000 81,600 Year 3 $63,200 16,000 Year 2 Year 4 Opportunity #1 Opportunity #2 $47,200 86,400 $80,000 16,000 Mr. Kearns decides to use his past average return on mutual fund investments as the discount rate; it is 8 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? 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? Opportunity 1 Required A Required B >
Daryl Kearns saved $240,000 during the 30 years that he worked for a major corporation. Now he has retired at the age of 60 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 $160,000. The following table presents the estimated cash inflows for the two alternatives: Year 1 $44,000 81,600 Year 3 $63,200 16,000 Year 2 Year 4 Opportunity #1 Opportunity #2 $47,200 86,400 $80,000 16,000 Mr. Kearns decides to use his past average return on mutual fund investments as the discount rate; it is 8 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? 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? Opportunity 1 Required A Required B >
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Daryl Kearns saved $240,000 during the 30 years that he worked for a major corporation. Now he has retired at the age of 60 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 $160,000. The
following table presents the estimated cash inflows for the two alternatives:
Year 4
$80,000
Year 1
Year 2
Year 3
Opportunity #1
Opportunity #2
$44,000
81,600
$47,200
$63,200
86,400
16,000
16,000
Mr. Kearns decides to use his past average return on mutual fund investments as the discount rate; it is 8 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?
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?
Opportunity 1
< Required A
Required B
>
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