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 $22,000 for 900 shares of Malti Company’s common stock. She received a $684 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 $22,000. Kathy would like to earn a return of at least 9% on all of her investments. She is not sure whether the Malti Company stock provided a 9% return and would like some help with the necessary computations.

Click here to view Exhibit 7B-1 and Exhibit 7B-2, to determine the appropriate discount factor(s) using tables.

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 9% return?

Complete this question by entering your answers in the tabs below.

• Required 1
• Required 2

Compute the net present value that Kathy earned on her investment in Malti Company stock. (Negative amounts should be indicated by a minus sign. Round your final answer to the nearest whole dollar amount.)

npv

Answer 1

Solution 1:

Computation of NPV - Kathy Mayers
Particulars	Period	PV Factor	Amount	Present Value
Cash outflows:
Initial investment	0	1	$22,000	$22,000
Present Value of Cash outflows (A)				$22,000
Cash Inflows
Year 1	1	0.917	$684	$627
Year 2	2	0.842	$684	$576
Year 3	3	0.772	$22,684	$17,512
Present Value of Cash Inflows (B)				$18,715
Net Present Value (NPV) (B-A)				-$3,285

Solution 2:

As NPV is negative, it means Malti stock did not provide 9% return.