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 1Year 2Year 3Year 4Opportunity # 1$178,000$188,000$252,000$324,000Opportunity # 2328,000348,00056,00048,000 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 #1Compute for the Net Present Value of opportunity #2Compute for the Profitability Index of opportunity #2Based 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?

The question is related to Capital Budgeting.1. The Net Present value is calculated with the help of…

Answered: Uncle Ben saved $800.000 during the 25…

Pfin (with Mindtap, 1 Term Printed Access Card) (mindtap Course List)

7th Edition

ISBN:9780357033609

Author:Randall Billingsley, Lawrence J. Gitman, Michael D. Joehnk

Publisher:Randall Billingsley, Lawrence J. Gitman, Michael D. Joehnk

Chapter14: Planning For Retirement

Section: Chapter Questions

Problem 2FPE

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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 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	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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