Chapter 26: Q11RQ (page 1463)
What are some criticisms of the payback method?
Answer
The payback method ignores the time value of money.
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How is IRR calculated with equal net cash inflows?
How is payback calculated with equal net cash inflows?
Hicks Company is considering an investment opportunity with the following expected net cash inflows: Year 1, \(235,000; Year 2, \)195,000; Year 3, \(125,000. The company uses a discount rate of 6%, and the initial investment is \)365,000. Calculate the NPV of the investment. Should the company invest in the project? Why or why not?
Congratulations! You have won a state lottery. The state lottery offers you the following (after-tax) payout options:
Option #1: \(12,000,000 after five years Option #2: \)2,150,000 per year for five years Option #3: $10,000,000 after three years |
Assuming you can earn 6% on your funds, which option would you prefer?
You are planning for a very early retirement. You would like to retire at age 40 and have enough money saved to be able to withdraw \(215,000 per year for the next 40 years (based on family history, you think you will live to age 80). You plan to save by making 10 equal annual installments (from age 30 to age 40) into a fairly risky investment fund that you expect will earn 10% per year. You will leave the money in this fund until it is completely depleted when you are 80 years old.
Requirements
1. How much money must you accumulate by retirement to make your plan work? (Hint:Find the present value of the \)215,000 withdrawals.)
2. How does this amount compare to the total amount you will withdraw from the investment during retirement? How can these numbers be so different?
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