Question

Daryl Kearns saved $280,000 during the 25 years that he worked for a mejor 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 $187.000. The following table presents the estimated cash inflows for the two alternatives: 55,655 $78,STO oportunity Opportunity 101,438 14 See 18,180 Mr. Kearns decides to use his past average return on mutual fund investments as the discount rateitis 10 percent. (PV of $1 and PVA of $1 (Ure appropriate factor(s) from the tables provided.) Required a. Compute the net present value of each opportunity. Which should Mt. Kearns adopt based on the net present value approach? b. Compute the payback period for each opportunity. Which should Mt. Kearns adopt based on the payback approach? Complete this question by entering your answers in the tabs below. Required A compute the present value of each opportunity, which should Mr. Kearns adopt based on the net present valu approach Roune your intermediate calculations and final aner to implaces erunt che u d be chosen Required

Answer 1

a. Computation of Net Present Value of Opportunity 1 :-
Year	Annual Cash Flows	PV Factor @ 10%	Present Value
a	b	c	d = b*c
0	$                                                               (187,000)	1.000000	$                    (187,000)
1	$                                                                   55,655	0.909091	$                        50,595
2	$                                                                   58,800	0.826446	$                        48,595
3	$                                                                   78,870	0.751315	$                        59,256
4	$                                                                 101,430	0.683013	$                        69,278
NPV of the Opportunity 1			$                       40,725
Computation of Net Present Value of Opportunity 2 :-
Year	Annual Cash Flows	PV Factor @ 10%	Present Value
a	b	c	d = b*c
0	$                                                               (187,000)	1.000000	$                    (187,000)
1	$                                                                 103,900	0.909091	$                        94,455
2	$                                                                 109,200	0.826446	$                        90,248
3	$                                                                   18,100	0.751315	$                        13,599
4	$                                                                   14,500	0.683013	$                          9,904
NPV of the Opportunity 2			$                       21,205
		Net Present Value
	Opportunity 1	$                              40,725
	Opportunity 2	$                              21,205
	Which Opportunity should be chosen?	Opportunity 1
b. Computation of Payback period of Opportunity 1 :-
Year	Annual Cash Flows	Cumulative Cash Flows
a	b	c
1	$                                                                   55,655	$                      55,655
2	$                                                                   58,800	$                    114,455
3	$                                                                   78,870	$                    193,325
4	$                                                                 101,430	$                    294,755
	Initial Cost =	$                           187,000
	Payback period of Opportunity 1 =	2 years +	187000-114455
			$78,870
	Payback period of Opportunity 1 =	2 years +	0.92
	Payback period of Opportunity 1 =	2.92 years
Computation of Payback period of Opportunity 2 :-
Year	Annual Cash Flows	Cumulative Cash Flows
a	b	c
1	$                                                                 103,900	$                    103,900
2	$                                                                 109,200	$                    213,100
3	$                                                                   18,100	$                    231,200
4	$                                                                   14,500	$                    245,700
	Initial Cost =	$                           187,000
	Payback period of Opportunity 2 =	1 year +	187000-103900
			$109,200
	Payback period of Opportunity 2 =	1 year +	0.76
	Payback period of Opportunity 2 =	1.76 years
		Payback Period
	Opportunity 1	2.92 years
	Opportunity 2	1.76 years
	Which Opportunity should be chosen?	Opportunity 2

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