On January 2, Fred Critchfield paid $18,000 for 900 shares of the common stock o

ID: 2374499 • Letter: O

Question

On January 2, Fred Critchfield paid $18,000 for 900 shares of the common stock of Acme Company. Mr. Critchfield received an $0.80 per share dividend on the stock at the end of each year for four years. At the end of four years, he sold the stock for $22,500. Mr. Critchfield has a goal of earning a minimum return of 12% 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, intermediate and final answers to the nearest dollar amount. Omit the "$" sign in your response.)

Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables.

Explanation / Answer

Hi,

Please find the answer as follows:

Part A:

NPV = -18000 + 900*.80*3.037 + 22500*.636 = -1503.36 or 1503

Part B:

No, Mr. Critchfield earned a 12% return on the stock since the NPV is negative.

Thanks.

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On January 2, Fred Critchfield paid $18,000 for 900 shares of the common stock o

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