IDNLearn.com makes it easy to find the right answers to your questions. Our experts are available to provide accurate, comprehensive answers to help you make informed decisions about any topic or issue you encounter.

Net Present Value Analysis [LO12-2]
Kathy Myers frequently purchases stocks and bonds, but she is uncertain how to determine the rate of return that she is earning. For example, three years ago she paid $13,000 for 200 shares of Malti Company’s common stock. She received a $420 cash dividend on the stock at the end of each year for three years. At the end of three years, she sold the stock for $16,000. Kathy would like to earn a return of at least 14% on all of her investments. She is not sure whether the Malti Company stock provide a 14% return and would like some help with the necessary computations.
Required:
1. Compute the net present value that Kathy earned on her investment in Malti Company stock.
2. Did the Malti Company stock provide a 14% return?


Sagot :

Answer:

NPV = $-1,225.37

No. The return is less than 14%, because the net present value is negative

Explanation:

Net present value is the present value of after-tax cash flows from an investment less the amount invested.  

Only projects with a positive NPV should be accepted. A project with a negative NPV should not be chosen because it isn't profitable.  

NPV can be calculated using a financial calculator

Cash flow in year 0 = $-13,000

Cash flow in year 1 and 2 = 420

Cash flow in year 3 = $420 + $16,000 = $16,420.

I = 14%

NPV = $-1,225.37

The return is less than 14%, because the net present value is negative

To find the NPV using a financial calculator:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. after inputting all the cash flows, press the NPV button, input the value for I, press enter and the arrow facing a downward direction.  

3. Press compute  

Thank you for joining our conversation. Don't hesitate to return anytime to find answers to your questions. Let's continue sharing knowledge and experiences! Thank you for visiting IDNLearn.com. We’re here to provide dependable answers, so visit us again soon.