On January 2, Fred Critchfield paid $19,000 for 930 shares of the common stock o

Question

On January 2, Fred Critchfield paid $19,000 for 930 shares of the common stock of Acme Company. Mr. Critchfield received an $0.79 per share dividend on the stock at the end of each year for six years. At the end of six years, he sold the stock for $22,000. Mr. Critchfield has a goal of earning a minimum return of 17% on all of his investments. (Ignore income taxes.)

Determine the net present value. (Negative amount should be indicated by a minus sign. Round discount factor(s) to 3 decimal places, other intermediate calculations and final answer to the nearest whole dollar.)

Wriston Company has $220,000 to invest. The company is trying to decide between two alternative uses of the funds. The alternatives are as follows:

The working capital needed for project B will be released for investment elsewhere at the end of four years. Wriston Company uses a 18% discount rate. (Ignore income taxes.)

Click here to view Exhibit 11B-1 and Exhibit 11B-2, to determine the appropriate discount factor(s) using tables.

Calculate net present value for each project. (Negative amounts should be indicated by a minus sign.Leave no cells blank - be certain to enter "0" wherever required. Round discount factor(s) to 3 decimal places, other intermediate calculations and final answers to the nearest whole dollar.)

On January 2, Fred Critchfield paid $19,000 for 930 shares of the common stock of Acme Company. Mr. Critchfield received an $0.79 per share dividend on the stock at the end of each year for six years. At the end of six years, he sold the stock for $22,000. Mr. Critchfield has a goal of earning a minimum return of 17% on all of his investments. (Ignore income taxes.)

Explanation / Answer

(a) Initial Inv = -19000

Net Inc for next 5 Yrs = 0.79*19000=$15,010

In Y6, CF = $15,010 + 22000 = 37010

So NPV = NPV(Rate,CF1..Cf6) + CF0

= NPV(17%,15010,15010,15010,15010,15010,37010)-19000

= $43,450

Or NPV = -19000+15010*(1/(1+17%)+1/(1+17%)^2+1/(1+17%)^3+1/(1+17%)^4+1/(1+17%)^5) + 37010/(1+17%)^6

= $43,450 .............Ans (a1)

As NPV is positive, Mr C got 17% return ..Ans (a2)

(b)

Proj A: CF0=-220000. SLN dep = (220000-22000)/4 =49500

CF1...CF3 = 95000+Dep written back = 95000+49500 =144500

CF4 = 95000+49500+22000 = 166500

So NPV = NPV(Rate,CF1..Cf4)+CF0

= NPV(18%,144500,144500,144500,166500)-220000

=$180,061

Or NPVa = -220000+144500*(1/(1+18%)^1+1/(1+18%)^2+1/(1+18%)^3) + 166500/(1+18%)^4

= $180,061

Proj B: CF0 = -220000

CF1...CF3 = 85000

CF4 = 85000+Wrkg cap recovered = 85000+220000 = 305000

So NPV= Npv(18%,85000,85000,85000,305000)-220000

= $122,129

Or NPVb = -220000 + 85000*(1/(1+18%)^1+1/(1+18%)^2+1/(1+18%)^3) + 305000/(1+18%)^4 = $122,129

As NPVa> NPVb, Proj A is recommended

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