Question

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

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%.