Using net present value and payback period to evaluate investment opportunities Margaret Hubbard just won a lottery

Question:

Using net present value and payback period to evaluate investment opportunities Margaret Hubbard just won a lottery and received a cash award of $800,000 net of tax. She is 61 years old and would like to retire in four years. Weighing this important fact, she has found two possible investments, both of which require an immediate cash payment of $640,000. The expected cash inflows from the two investment opportunities are as follows.

Year 3 Year 4 Year 1 Year 2 $208,000 107,200 Opportunity A Opportunity B $364,800 $134,400 540,800 $118,400 236,800 91,2

Ms. Hubbard decided that her required rate of return should be 10 percent.
Required
a. Compute the net present value of each opportunity. Which should Ms. Hubbard choose based on the net present value approach?
b. Compute the payback period for each opportunity. Which should Ms. Hubbard choose based on the payback approach?
c. Compare the net present value approach with the payback approach. Which method is better in the given circumstances?

Net Present Value
What is NPV? The net present value is an important tool for capital budgeting decision to assess that an investment in a project is worthwhile or not? The net present value of a project is calculated before taking up the investment decision at... Payback Period
Payback period method is a traditional method/ approach of capital budgeting. It is the simple and widely used quantitative method of Investment evaluation. Payback period is typically used to evaluate projects or investments before undergoing them,...