Uncle Ben 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 $600.000. The following table presents the estimated cash inflows for the two alternatives. Year 1 Year 2 Year 3 Year 4 Opportunity # 1 $178,000 $188,000 $252,000 $324,000 Opportunity # 2 328,000
Uncle Ben 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 $600.000. The following table presents the estimated cash inflows for the two alternatives. Year 1 Year 2 Year 3 Year 4 Opportunity # 1 $178,000 $188,000 $252,000 $324,000 Opportunity # 2 328,000
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Uncle Ben 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 $600.000. The following table presents the estimated
|
|
Year 1 |
Year 2 |
Year 3 |
Year 4 |
|
Opportunity # 1 |
$178,000 |
$188,000 |
$252,000 |
$324,000 |
|
Opportunity # 2 |
328,000 |
348,000 |
56,000 |
48,000 |
Uncle Ben decides to use his past average return on mutual fund investments as the discount rate; it is 8 percent.
Answer this question:
- Compute for the
Net Present Value of opportunity #1. - Compute for the Profitability Index of opportunity #1
- Compute for the Net Present Value of opportunity #2
- Compute for the Profitability Index of opportunity #2
- Based on your computations above, which opportunity is more favorable?
- Compute for the Modified Payback Period of opportunity #1.
- Compute for the Modified Payback Period of opportunity #2.
- Based on your computed modified payback periods, which opportunity is more favorable?
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- Compute for the Modified Payback Period of opportunity #1.
- Compute for the Modified Payback Period of opportunity #2.
- Based on your computed modified payback periods, which opportunity is more favorable?
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