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Payback Option with the Highest Return

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Bill Martin made an investment several years ago, and he now has an option as to how it will take the return on that investment. Option 1 is to receive an immediate cash payment of $100,000. Option 2 is to receive a payment of $10,000 per year for the next 10 years and then to receive a final payment of $100,000 in the eleventh year. Option 3 is to receive a payment of $20,000 per year for the next 10 years. Bill desires a rate of return on this investment of at least 8%. Which option will return the most to Bill?

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Solution Summary

The best return option for an investment made several years ago is worked out in an attached Excel spreadsheet.

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Number crunch analysis

See the attached file.

1. Use Excel, or another suitable program, to calculate each of the following; show your work:
- Payback Period for Option A
- Internal Rate of Return for Option A
- Net Present Value for Option A
- Payback Period for Option B
- Internal Rate of Return for Option B
- Net Present Value for Option B

2. Using the calculations in the first criterion, clearly present the results for Option A and for Option B as though for an audience of city council members.

3. The city council says they can adopt only one (1) of the projects this year. Pick one (1) and justify the choice to the city council.

4. You are getting push back from the city engineer that both projects are vital and should be done this year. You really want to find a way to make both projects happen. Create a solution that would allow both projects to be implemented. Note: in this case, the Required Return is 12% and the Critical Acceptance Level is 2.75 years.

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