Question

44

Check Daryl Kearns saved $240,000 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 $191,500. The following table presents the estimated cash inflows for the two alternatives: Year 3 Year 4 Year 2 Year 1 $101,320 15,700 Opportunity i#1 $ 55 ,675 Opportunity #2 $78, 790 17,600 58,870 109,500 104,400 Mr. Kearns decides to use his past average return on mutual fund investments as the discount rate; it is 9 percent. (PV of $1 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?

Answer 1

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ANS Amunt in $ (@j_ Nen_present_value of oppertunity -1 : +(91500) + 55675 + 58870 +78,790 + 101,320 140 1-09 3* (-4)3* (1999) =(191500) + 51077.98 + 49549.70 +60840.34+ 71777164 = $ 44,745.66 & Nel present varue of oppertunity 2 : =(191500)+ 104 400 + 109500 + 17600 + 15700 100g Tong)2 (1009j3 pioggy = (191,500) + 95479182792163.96713590.43+11122:28 = $21156:49 Hence, Alternative -1 should be chosen.

Ch) x paybala period of each alternative: _ Alternahre-- : Initial Investment less: Year -1 cash inflow 191500 (55670) 135830 (58870) 76960 78 790 Alternative - 2 191500 (loy yoo) 87,100 (109500) (22400) less: Year-2 cash inflow : Less: year-3 cash inflow : (1830) # payback period of Alternative of is 3 years Alternative-2 is 2 year. * payback period of Hence, Alternative-2 should be chosen.

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