Required a. Compute the net present value of each opportunity. Which should Mr. Keams 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?
Required a. Compute the net present value of each opportunity. Which should Mr. Keams 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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Question
![Daryl Kearns saved $250,000 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 $183,000. The
following table presents the estimated cash inflows for the two alternatives:
Opportunity #1
Opportunity #2
Year 1
$ 55,630
104,100
Year 2
$ 58,820
109,450
Year 3
$78,930
17,100
Mr. Keams decides to use his past average return on mutual fund Investments as the discount rate: It is 8 percent. (PV of $) and PVA of
$1) (Use appropriate factor(s) from the tables provided.)
Required
Opportunity 1
Opportunity 2
Which opportunity should be chosen?
a. Compute the net present value of each opportunity. Which should Mr. Kears 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.
Year 4
$101,350
16,000
Required A Required B
Compute the payback period for each opportunity. Which should Mr. Keams adopt based on the payback approach?
Payback Period
Required A
years
years
Repoed >](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F9cad10d6-7f17-41c4-9797-4437b73be31d%2F0220a056-e70e-4f1c-aeaa-4443f0394809%2Fovh1pfw_processed.jpeg&w=3840&q=75)
Transcribed Image Text:Daryl Kearns saved $250,000 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 $183,000. The
following table presents the estimated cash inflows for the two alternatives:
Opportunity #1
Opportunity #2
Year 1
$ 55,630
104,100
Year 2
$ 58,820
109,450
Year 3
$78,930
17,100
Mr. Keams decides to use his past average return on mutual fund Investments as the discount rate: It is 8 percent. (PV of $) and PVA of
$1) (Use appropriate factor(s) from the tables provided.)
Required
Opportunity 1
Opportunity 2
Which opportunity should be chosen?
a. Compute the net present value of each opportunity. Which should Mr. Kears 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.
Year 4
$101,350
16,000
Required A Required B
Compute the payback period for each opportunity. Which should Mr. Keams adopt based on the payback approach?
Payback Period
Required A
years
years
Repoed >
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