Wonda Munro just won a lottery and received a cash award of $450,000 net of tax. She
Question:
Wonda Munro just won a lottery and received a cash award of $450,000 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 $360,000. The expected cash inflows from the two investment opportunities are as follows:
Ms. Munro decided that her required rate of return should be 10 percent.
Required
Round your computations to two decimal points.
a. Compute the net present value of each opportunity. Which should Ms. Munro choose based on the net present value approach?
b. Compute the payback period for each opportunity. Which should Ms. Munro 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?
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,...
Step by Step Answer:
Fundamental Managerial Accounting Concepts
ISBN: 978-1259569197
8th edition
Authors: Thomas Edmonds, Christopher Edmonds, Bor Yi Tsay, Philip Olds