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 $21,000 for 950 shares of Malti Company's common stock. She received a $770 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 $24,000. Kathy would like to earn a return of at least 9% on all of her investments. She is not sure whether the Malti Company stock provided a 9% return and would like some help with the necessary computations Click here to view Exhibit 7B-1 and Exhibit 7B-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 9% return? Complete this question by entering your answers in the tabs below. Required 1 Required 2 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 - Required in Required 2 >

Answer 1

Solution 1:

Computation of NPV
Particulars	Period	PV Factor	Amount	Present Value
Cash outflows:
Initial investment	0	1	$21,000	$21,000
Present Value of Cash outflows (A)				$21,000
Cash Inflows
Year 1	1	0.91743	$770	$706
Year 2	2	0.84168	$770	$648
Year 3	3	0.77218	$24,770	$19,127
Present Value of Cash Inflows (B)				$20,481
Net Present Value (NPV) (B-A)				-$519

Solution 2:

As NPV is negative, it means Malti company stock did not provided 9% return

Note: As PV factor table is not given in question, i have rounded off PV factor up to 5 decimal places, Therefore actual answer may differ due to rounding off differences.