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:

  

	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			14,500

  

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.)

	Net Present Value
Opportunity 1	INCORRECT $49,888.00
Opportunity 2	INCORRECT $26,179.00

Answer 1

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
			209678

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.