Question

Exercise 13-10 Net Present Value Analysis [LO13-2]

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 $23,000 for 500 shares of Malti Company’s common stock. She received a $460 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 $30,000. Kathy would like to earn a return of at least 13% on all of her investments. She is not sure whether the Malti Company stock provided a 13% return and would like some help with the necessary computations.

Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables.

Link for Exhibit 13B-1: https://ezto-cf-media.mheducation.com/Media/Connect_Production/bne/accounting/Garrison_16e/exhibit_13B_1.jpg

Link for Exhibit 13B-2: https://ezto-cf-media.mheducation.com/Media/Connect_Production/bne/accounting/Garrison_16e/exhibit_13B_2.jpg

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 13% return?

1.

Net present value

?

2.

Yes or No?

Answer 1

Solution 1:

Computation of NPV - Kathy Mayers
Particulars	Period	PV Factor	Amount	Present Value
Cash outflows:
Initial investment	0	1	$23,000	$23,000
Present Value of Cash outflows (A)				$23,000
Cash Inflows
Year 1	1	0.885	$460	$407
Year 2	2	0.783	$460	$360
Year 3	3	0.693	$30,460	$21,109
Present Value of Cash Inflows (B)				$21,876
Net Present Value (NPV) (B-A)				-$1,124

Solution 2:

As NPV is negative, it means Malti company should did not provide 13% return