Question

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 provided a 14% return and would like some help with the necessary computations. (Ignore income taxes.)
a. Determine the net present value. (Any cash outflows should be indicated by a minus sign. Round discount factor(s) to 3 decimal places and final answers to the nearest whole dollar.)

Answer 1

Answer:

The net present value is $1,224.886

Explanation:

The computation of the Net present value is shown below

= Present value of all yearly cash inflows after applying discount factor - initial investment

The discount factor should be computed by

= 1 ÷ (1 + rate) ^ years

where,  

rate is 14%  

Year = 0,1,2,3

Discount Factor:

For Year 1 = 1 ÷ 1.14^1 = 0.8772

For Year 2 = 1 ÷ 1.14^2 = 0.7695

For Year 3 = 1 ÷ 1.14^3 = 0.675

So, the calculation of a Present value of all yearly cash inflows are shown below

= Year 1 cash inflow × Present Factor of Year 1 + Year 2 cash inflow × Present Factor of Year 1 + Year 3 cash inflow + sale value × Present Factor of Year 1

= $420× 0.8772 + $420 × 0.7695 + $420 + $16,000 × 0.675

= $368.424 + $323.19 + $110,83.50

= $11,775.114

So, the Net present value equals to

= $13,000 - $11,775.114

= $1,224.886

We take the first four digits of the discount factor.