Question

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?

Answer 1

NPV = $-1,225.37

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

Step-by-step 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