Using net present value and payback period to evaluate investment opportunities Bruce Graham saved $250,000 during the

Question:

Using net present value and payback period to evaluate investment opportunities Bruce Graham saved $250,000 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 $187,500. The following table presents the estimated cash inflows for the two alternatives.

Year 1 Year 2 Year 3 Year 4 Opportunity #1 Opportunity #2 $ 55,625 102,500 $101,250 15,000 $ 58,750 108,750 $78,750 17,5

Mr. Graham decides to use his past average return on mutual fund investments as the discount rate; it is 8 percent.
Required
a. Compute the net present value of each opportunity. Which should Mr. Graham adopt based on the net present value approach?
b. Compute the payback period for each project. Which should Mr. Graham adopt based on the payback approach?
c. Compare the net present value approach with the payback approach. Which method is better in the given circumstances?

Net Present Value
What is NPV? The net present value is an important tool for capital budgeting decision to assess that an investment in a project is worthwhile or not? The net present value of a project is calculated before taking up the investment decision at... Payback Period
Payback period method is a traditional method/ approach of capital budgeting. It is the simple and widely used quantitative method of Investment evaluation. Payback period is typically used to evaluate projects or investments before undergoing them,...