Daryl Kearns saved $210,000 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 $192,000. The following table presents the estimated cash inflows for the two alternatives:

Year 1 Year 2 Year 3 Year 4

Opportunity #1 $ 55,665 $ 58,890 $ 78,840 $ 101,270

Opportunity #2 103,400 109,150 17,400 15,000

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

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?

Question

Daryl Kearns saved $210,000 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 $192,000. The following table presents the estimated cash inflows for the two alternatives:

	Year 1		Year 2		Year 3		Year 4
Opportunity #1	$	55,665	$	58,890	$	78,840	$	101,270
Opportunity #2		103,400		109,150		17,400		15,000

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

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?

Accepted Answer

The Answer is in the image, click to view ...

Question

Daryl Kearns saved $210,000 during the 25 years that he worked for a major corporation. Now he has retired at the age of 50 and

Step by Step Solution

Step: 1

Get Instant Access to Expert-Tailored Solutions

Step: 2

Step: 3

Ace Your Homework with AI

Recommended Textbook for

Accounting Information Systems Connecting Careers Systems And Analytics

Students also viewed these Accounting questions

Question

Question

Question

Question

Question

Question

Question

Question

Question

Question

Question

Question

Question

Question