Garry Piper’s rich uncle gave him $80,000 cash as a gift for his 40th birthday. Unlike his spoiled cousins who spend money carelessly, Mr. Piper wants to invest the money for his future retirement. After an extensive search, he is considering one of two investment opportunities. Project 1 would require an immediate cash payment of $60,000; Project 2 needs only a $30,000 cash payment at the beginning. The expected cash inflows are $18,000 per year for Project 1 and $9,200 per year for Project 2. Both projects are expected to provide cash flow benefits for the next four years.
Mr. Piper found that the interest rate for a four-year certificate of deposit is about 5 percent. He decided that this is his required rate of return.

Round indexes to six decimal points and other figures to two decimal points.
a. Compute the net present value of each project. Which project should Mr. Piper adopt based on the net present value approach?
b. Compute the approximate internal rate of return of each project. Which project should Mr. Piper adopt based on the internal rate of return approach?
c. Compare the net present value approach with the internal rate of return approach. Which method is better in the given circumstances?

  • CreatedFebruary 07, 2014
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