Question
Mr Smith saved $800,000 during the 25 years that he worked for a major corporation. Now he has retired at the age of 50 and
Mr Smith saved $800,000 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 $700,000. The following table presents the estimated cash inflows for the two alternatives. Year 1 Year 2 Year 3 Year 4 Opportunity #1 $210,000 $210,000 $287,000 $378,000 Opportunity #2 399,000 406,000 63,000 63,000 a) Compute the net present value of each opportunity. Which should Mr. Graham adopt based on the net present value approach? Opportunity 1 Opportunity 2
Please explain the math.
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