Daryl Kearns saved $290,000 during the 25 years that he worked for a major corpo
ID: 2430353 • Letter: D
Question
Daryl Kearns saved $290,000 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 $183,500. The following table presents the estimated cash inflows for the two alternatives:
Mr. Kearns decides to use his past average return on mutual fund investments as the discount rate; it is 9 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?
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.)
INCORRECT
$26,179.00
Year 1 Year 2 Year 3 Year 4 Opportunity #1 $ 55,635 $ 58,950 $ 78,880 $ 101,380 Opportunity #2 102,800 109,450 16,800 14,500Explanation / Answer
Note:
Many times differnce occur due to the rounding off difference. Please try one/ two number plus minus, in case above answer is not accepted.
Opportunity 1 Net Present Value Present value of cash inflow-Cash outflow $ 233386-183500 49886 Calculation of Present value of cash inflow Year Cash inflow ($) PVF @ 9% Present Value ($) 1 55635 0.9174 51040 2 58950 0.8417 49618 3 78880 0.7722 60911 4 101380 0.7084 71818 233386 Opportunity 2 Net Present Value Present value of cash inflow-Cash outflow $ 209678-183500 26178 Calculation of Present value of cash inflow Year Cash inflow ($) PVF @ 9% Present Value ($) 1 102800 0.9174 94309 2 109450 0.8417 92124 3 16800 0.7722 12973 4 14500 0.7084 10272 209678Related Questions
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