Daryl Kearns saved $300,000 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 $191,000. The following table presents the estimated cash inflows for the two alternatives: Opportunity #1 Opportunity #2 Year 1 $ 55,655 104,400 Year 2 $ 58,910 109, 650 Year 3 $78,900 18,300 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 Required A Required B 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? Year 4. $101,310 14,300 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 Required A Required B
Daryl Kearns saved $300,000 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 $191,000. The following table presents the estimated cash inflows for the two alternatives: Opportunity #1 Opportunity #2 Year 1 $ 55,655 104,400 Year 2 $ 58,910 109, 650 Year 3 $78,900 18,300 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 Required A Required B 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? Year 4. $101,310 14,300 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 Required A Required B
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
Related questions
Question
Transcribed Image Text:Daryl Kearns saved $300,000 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 $191,000. The
following table presents the estimated cash inflows for the two alternatives:
Opportunity #1
Opportunity #2
Year 1
$ 55,655
104,400
Year 2
$ 58,910
109, 650
Year 3
$78,900
18,300
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
Required A Required B
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.
Opportunity 1
Opportunity 2
Which opportunity should be chosen?
Year 4
$101,310
14,300
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
Required A
Required B
>
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 2 steps with 1 images
Recommended textbooks for you
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Horngren's Cost Accounting: A Managerial Emphasis…
Accounting
ISBN:
9780134475585
Author:
Srikant M. Datar, Madhav V. Rajan
Publisher:
PEARSON
Intermediate Accounting
Accounting
ISBN:
9781259722660
Author:
J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:
McGraw-Hill Education
Financial and Managerial Accounting
Accounting
ISBN:
9781259726705
Author:
John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:
McGraw-Hill Education