Daryl Kearns saved $280,000 during the 25 years that he worked for a major corpo

Question

Daryl Kearns saved $280,000 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 $188,000. The following table presents the estimated cash inflows for the two alternatives Year 1 55,67058,800 $78,900 $101,390 103,500 Year 2 Year 3 Year 4 Opportunity #1 Opportunity #2 109,000 17,400 14,800 Mr. Kearns decides to use his past average return on mutual fund investments as the discount rate; it is 10 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? Complete this question by entering your answers in the tabs below. Required A Required B Compute the net present value of each opportunity. Which should Mr. Kearns adopt based on the net present value approach? (Round your intermediate calculations and final answer to two decimal places.) Net Present Value Opportunity 1 Opportunity 2 Which opportunity should be chosen?

Explanation / Answer

Statement showing Cash flows Oppurtunity 1 Opputunity 2 Particulars Time PVf 10% Amount PV Cash Outflows                                 -                               1.00             (188,000.00)             (188,000.00)             (188,000.00)             (188,000.00) PV of Cash outflows = PVCO             (188,000.00)             (188,000.00) Cash inflows                             1.00                   0.909091                  55,670.00                  50,609.10                103,500.00                  94,090.92 Cash inflows                             2.00                   0.826446                  58,800.00                  48,595.02                109,000.00                  90,082.61 Cash inflows                             3.00                   0.751315                  78,900.00                  59,278.75                  17,400.00                  13,072.88 Cash inflows                             4.00                   0.683013                101,390.00                  69,250.69                  14,800.00                  10,108.59 PV of Cash Inflows =PVCI                227,733.56                207,355.01 NPV= PVCI - PVCO                  39,733.56                  19,355.01 PBP Oppurtunity 1 Oppurtunity 2 Time Amount Cumulative Amount Cumulative                                                                          -               (188,000.00)             (188,000.00)             (188,000.00)             (188,000.00)                                                                      1.00                  55,670.00             (132,330.00)                103,500.00                (84,500.00)                                                                      2.00                  58,800.00                (73,530.00)                109,000.00                  24,500.00                                                                      3.00                  78,900.00                    5,370.00                  17,400.00                  41,900.00                                                                      4.00                101,390.00                106,760.00                  14,800.00                  56,700.00 Payback period 2 + 73530/78900 1+84500/109000 Payback period 2.93 Years approx 1.78 years approx Oppurtunity 1 should be chosen due to higher NPV

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