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 $19,000 for 930 shares of Malti Company’s common stock. She received a $735 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 17% on all of her investments. She is not sure whether the Malti Company stock provided a 17% 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. 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 17% return?

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.)

	Net present value

Answer 1

Answer
Ans-1
	Year	Cash flows		discount factor 17%	PV of cash flows
Annual cash dividend	1--3	$           735	PV of annuity if $1	2.21	$           1,624.35
Sale of stock	3	$      22,000	PV of $1	0.624	$         13,728.00
Total PV of cash inflows
Less: Initial Investment	0	-$     19,000		1	-$         19,000.00
NPV					-$           3,647.65
if rounded					-$           3,648.00
ans 2
No. it dint provide 17% return as NPV is negative at 17% return