On January 2, 20X1, Bruce Greene invested $10,000 in the stock market and purcha

Question

On January 2, 20X1, Bruce Greene invested $10,000 in the stock market and purchased 500 shares of Heartland Development, Inc. Heartland paid cash dividends of $2.60 per share in 20X1 and 20X2; the dividend was raised to $3.10 per share in 20X3. On December 31, 20X3, Greene sold his holdings and generated proceeds of $13,000. Greene uses the net-present- value method and desires a 16% return on investments.

  Compute the investment's net present value, rounding calculations to the nearest dollar.

Explanation / Answer

Hi,

Please find the answer as follows:

Part A: List of Cash Flows:

Initial Outflow = -10000

Year 1 Cash Inflow = 500*2.6 = 1300

Year 2 Cash Inflow = 500*2.6 = 1300

Year 3 Cash Inflow = 500*3.10 = 1550

Year 3 Cash Inflow = 13000

Part B: Calculation of NPV:

NPV = -10000 + 1300/(1+.16)^1 +1300/(1+.16)^2 +1550/(1+.16)^3 +13000/(1+.16)^3 = 1408.37 or 1408

Greene should acquire the Hearland's Stock as it will generate a + NPV of 1408 as calculated above.

Thanks.

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