Question

1.     You are considering purchasing 100 shares of stock in Big Money Company. You expect the...

1.     You are considering purchasing 100 shares of stock in Big Money Company. You expect the stock to pay annual dividends of $950 at the end of each year, and to be worth $82,000 at the end of ten years, when you plan to sell the stock. The investment costs $43,000 and you need an annual return of 7.4%. What is the net present value of this investment? Note: This is a standard net present value problem.

     

Based on your calculations, will the total return on the investment be at least 7.4%?

Circle one:   Yes       No

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Answer #1

Present Value of dividend payment,

Where, P = $950, r =7.4%, n= 10 years

Present value of dividend payment = $6550.76

Present Value of share worth end of 10 years = 82000/1.074^10

Present Value of share worth end of 10 years = $40,157.90

Present value of future cash flow = 40157.90+6550.76

Present value of future cash flow = $46,708.66

Net Present Value = Present value of future cash flow - Initial Investment

Net Present Value =46708.66 - 43000

Net Present Value =$3,708.66

Here NPV of investment is positive means return on investment is higher than 7.4%.

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