Problem 16-21 Using net present value and payback period to evaluate investment opportunities LO 16-2, 16-4...

Problem 16-21 Using net present value and payback period to evaluate investment opportunities LO 16-2, 16-4

Daryl Kearns saved $240,000 during the 30 years that he worked for a major corporation. Now he has retired at the age of 60 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 $160,000. The following table presents the estimated cash inflows for the two alternatives:

	Year 1		Year 2		Year 3		Year 4
Opportunity #1	$	44,000	$	47,200	$	63,200	$	80,000
Opportunity #2		81,600		86,400		16,000		16,000

Mr. Kearns decides to use his past average return on mutual fund investments as the discount rate; it is 8 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?

Solutions

Expert Solution

ekkarill92 answered 1 year ago

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