Roger Rosich saved $300,000 during the 30 years that he worked for a major corpo

Question

Roger Rosich saved $300,000 during the 30 years that he worked for a major corporation. Now he has retired at the age of 60 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 $200,000. The following table presents the estimated cash inflows for the two alternatives.

  

  

  

Compute the net present value of each opportunity. (Round your intermediate calculations and final answer to 2 decimal places.)

Year 1 Year 2 Year 3 Year 4   Opportunity #1 $ 55,000 $ 59,000 $ 79,000 $ 100,000   Opportunity #2 102,000 108,000 20,000 20,000

Explanation / Answer

FIRST OF ALL LET US CALCULATE THE PV OF THE FUTURE CASH FLOWS USING THE PV FACTOR @ 8%

PV FACTOR 1 2 3 4   

0.9259 0.8573 0.7938 0.7350

OPPORTUNITY 1 55000 59000 79000 100000   

ON MULTIPLYING 50924.50 50585.70 62710.20 73500   

TOTAL = 50924.5 + 50585.70 + 62710.20 + 73500 = 237720.40 - 200000 = 37720.40 ( NET INFLOW)

OPPORTUNITY 2 102000 108000 20000 20000

ON MULTIPLYING 94441.80 92588.40 15876 14700

TOTAL = 94441.80 + 92588.40 + 15876 + 14700 = 217606.20 - 200000 = 17606.20 ( NET INFLOW)

HENCE WE SEE THAT IN OPTION 1 THE NET INFLOW IS MORE AS COMPARED TO THE OPTION 2 .

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