Question

Daryl Kearns saved $220,000 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 $190,500. The following table presents the estimated cash inflows for the two alternatives: Opportunity 1 Opportunity # 2 Year 1 $ 55,665 1 04,200 Year 2 $ 58,930 109,480 Year 3 $78,810 17,500 Year 4 5101,320 15,800 Mr. Kearns decides to use his past average return on mutual fund investments as the discount rate; it is 12 percent. (PV of S1 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.

Answer 1

Opportunity # 1 @ 12 Cummulative PV PV of Cash inflows PV Factor Cash inflows Cash inflows Year 49703 55665 58930 78810 49703 96682 152779 217168 0.8929 0.7972 46979 56097 2 0.7118 0.6355 101320 64389 4 217168 -190500 Initial investment ==: 26668 Net prasent value = 3.59 Years Paybackperiod

Opportunity #2 @ 12 Cummulative PV PV of Cash inflows PV Factor Cash inflows Cash inflows 0.8929 0.7972 0.7118 Year 104200 109400 17800 15800 93040 93040 1 87214 12670 180254 192924 202965 2 10041 0.6355 4 202965 190500 Initial investment 393465 2.81 Years Net prasent value Paybackperiod Net Present Value 1) Particulars Opportunity 1 Opportunity #2 Select 26668 393465 Opportunity #1 2) Particulars Opportunity 1 Opportunity #2 Select Payback period 3.59 Years 2.81 Years Opportunity #2