Question

On January 2 Fred paid $18,000 for 900 shares of common stock of Acme Company. Fred received a $0.80 per share dividend on the stock at the end of each year for four years. At the end of four years, he sold the stock for $22,500. Fred has a goal of earning a minimum return of 12% on all of his investments.

Required:
a. Determine the net present value.
b. Did Mr. Critchfield earn a 12% return on the stock?

Answer 1

a) initial outlay = -$18,000

cash flow 1= $0.80 x 900 = $720

cash flow 2= $0.80 x 900 = $720

cash flow 3= $0.80 x 900 = $720

cash flow 4= $720 + $22,500 = $23,220

NPV = -$18,000 + $720/1.12 + $720/1.12² + $720/1.12³ + $23,220/1.12⁴ = -$1,513.95

b) no, he actually earned 9.43% (IRR) on the stock. If Fred had earned 12% or more, then the NPV would be positive.