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. ICE Amour Item RATE NPER PMT FV

Answer 1

a.

Item	Amount
RATE	10%	Rate of Return required
NPER	3	No. of Years
PMT	823	Yearly Payment
FV	22000	Payment at end of 3 years

b.

Item	Amount
Present Value of Inflows	$     18,575.60	=-PV(10%,3,823,22000,0)
Less Initial Investment	$     24,000.00
Net Present Value	($5,424.40)

c.
Since the Net Present Value of Investment at minimum required rate of 10% is negative, this means that Kathy is not able to earn 10% rate of return from investment, rate of return is lower than 10%

Answer is NO

d.

Item	Amount
NPER	3	No. of Years
PMT	823	Yearly Payment
FV	22000	Payment at end of 3 years
PV	-24000	Investment Value
RATE	0.67%