Uncle Ben saved $800,000 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 $600,000. The following table presents the estimated cash inflows for the two alternatives. Year 1 Year 2 Year 3 Year 4 Opportunity # 1 $178,000 $188,000 $252,000 $324,000 Opportunity # 2 328,000 348,000 56,000 48,000 Uncle Ben decides to use his past average return on mutual fund investments as the discount rate; it is 8 percent. Answer the questions: 1. Compute for the Accounting Rate of Return of opportunity #1. 2. Compute for the Accounting Rate of Return of opportunity #2. 3. Compute for the Internal Rate of Return of opportunity #1. 4. Compute for the Internal Rate of Return of opportunity #2.
Uncle Ben saved $800,000 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 $600,000. The following table presents the estimated cash inflows for the two alternatives. Year 1 Year 2 Year 3 Year 4 Opportunity # 1 $178,000 $188,000 $252,000 $324,000 Opportunity # 2 328,000 348,000 56,000 48,000 Uncle Ben decides to use his past average return on mutual fund investments as the discount rate; it is 8 percent. Answer the questions: 1. Compute for the Accounting Rate of Return of opportunity #1. 2. Compute for the Accounting Rate of Return of opportunity #2. 3. Compute for the Internal Rate of Return of opportunity #1. 4. Compute for the Internal Rate of Return of opportunity #2.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Uncle Ben saved $800,000 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 $600,000. The following
table presents the estimated cash inflows for the two alternatives.
Year 1 Year 2 Year 3 Year 4
Opportunity # 1 $178,000 $188,000 $252,000 $324,000
Opportunity # 2 328,000 348,000 56,000 48,000
Uncle Ben decides to use his past average return on mutual fund
investments as the discount rate; it is 8 percent.
Answer the questions:
1. Compute for the Accounting Rate of Return of opportunity #1.
2. Compute for the Accounting Rate of Return of opportunity #2.
3. Compute for the Internal Rate of Return of opportunity #1.
4. Compute for the Internal Rate of Return of opportunity #2.
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