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 $24,000 for 980 shares of Malti Company’s common stock. She received a $823 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 10% on all of her investments. She is not sure whether the Malti Company stock provided a 10% return and would like some help with the necessary computations. (Ignore income taxes.)

    

Required:

a.	Enter the Excel inputs below to be used to calculate the present value of the cash inflows from the investment.

     

b.	Calculate the present value of the cash inflows from the investment and the net present value of the investment. (Any cash outflows should be indicated by a minus sign. Use Microsoft Excel to calculate present values and do not round intermediate calculations.)

     

c.	Did Kathy Myers earn at least a 10% return on her investment?
	Yes No

d.	Enter the Excel formula inputs and calculate the Internal Rate of Return for Kathy's investment.

     

Answer 1

Solution a:

Excel Inputs to be used to calculate Present Value of Cash Inflows
Years	Cash Inflows	Rate	PV Factor	Present Value
1	$823.00	10%	0.909091
2	$823.00	10%	0.826446
3	$22,823.00	10%	0.751315

Solution b:

Excel Inputs to be used to calculate Present Value of Cash Inflows
Years	Cash Inflows	Rate	PV Factor	Present Value
1	$823.00	10%	0.909091	$748.18
2	$823.00	10%	0.826446	$680.17
3	$22,823.00	10%	0.751315	$17,147.26
Total				$18,575.60

Net Present Value = Present value of cash inflows - Initial investment = $18,575.60 - $24,000 = ($5,424.40)

Solution 3:

As NPV is negative, it means Kathy did not earn 10% return on investment

Solution 4:

Computation of IRR
Period	Cash Flows	IRR
0	-24000	0.67%
1	823
2	823
3	22823