## Question

###### 4 Daryl Kearns saved $240,000 during the 25 years that he worked for a major corporation....

## Answers

Net Present value = Present value of cash inflows – Present value of cash outflows

Opportunity 1 = 55,675*PVF(9%, 1 year) + 58,870*PVF(9%, 2 years) + 78,790*PVF(9%, 3 years) + 101,320*PVF(9%, 4 years)- 191,500

= 55,675*0.917 + 58,870*0.842 + 78,790*0.772 + 101,320*0.708 – 191,500

= $41,682.96

Opportunity 2 = 104,400*PVF(9%, 1 year) + 109,500*PVF(9%, 2 years) + 17,600*PVF(9%, 3 years) + 15,700*PVF(9%, 4 years)- 191,500

= $21,136.6

Choose Opportunity 1

Payback period is the time period in which The initial investment is receovered. Lower the better

Opportunity 1

Year

Cash Flows

Cumulative Cash Flows

0

-191,500

-191,500

1

55,675

-135,825

2

58,870

-76,955

3

78,790

1,835

4

101,320

103,155

Payback period = 2+ 76955/78790 = 2.98 years

Opportunity 2

Year

Cash Flows

Cumulative Cash Flows

0

-191,500

-191,500

1

104,400

-87,100

2

109,500

22,400

3

17,600

40,000

4

15,700

55,700

Payback period = 1+ 87100/109500 = 1.80 years

Choose Opportunity 2