In: Accounting
Daryl Kearns saved $260,000 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
$189,500. The following table presents the estimated cash inflows
for the two alternatives:
Year 1 | Year 2 | Year 3 | Year 4 | |||||||||
Opportunity #1 | $ | 55,655 | $ | 58,940 | $ | 78,880 | $ | 101,260 | ||||
Opportunity #2 | 104,100 | 108,950 | 16,600 | 14,100 | ||||||||
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
Compute the net present value of each opportunity. Which should Mr. Kearns adopt based on the net present value approach?
Compute the payback period for each opportunity. Which should Mr. Kearns adopt based on the payback approach?