On January 2, Fred Critchfield paid $15,000 for 890 shares of the common stock o

Question

On January 2, Fred Critchfield paid $15,000 for 890 shares of the common stock of Acme Company. Mr. Critchfield received an $0.75 per share dividend on the stock at the end of each year for eight years. At the end of eight years, he sold the stock for $22,500. Mr. Critchfield has a goal of earning a minimum return of 7% 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.)

On January 2, Fred Critchfield paid $15,000 for 890 shares of the common stock of Acme Company. Mr. Critchfield received an $0.75 per share dividend on the stock at the end of each year for eight years. At the end of eight years, he sold the stock for $22,500. Mr. Critchfield has a goal of earning a minimum return of 7% on all of his investments. (Ignore income taxes.)

Required: a.

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.)

  Net present value $   

b. Did Mr. Critchfield earn a 7% return on the stock? Yes No

Explanation / Answer

a.

Thus, Net Present Value(NPV) is $ 2081.05.

b)

Net Present Value is 2081. Investment is 15,000

REturn on Investment = (2081/15000)*100

                                    = 13.9%

Thus,

Yes, Mr.Critchfield earned more than 7% return on the stock.

Investment of Fred Critchfield = $15,000 Inflow: 1) Dividend of .75 per share at the end of year for 8 Years 2) Sale of share at 22,500 at the end of 8th Year Minimum return on investment                 0.07 Particulars Years Cash Inflow Discount Factor @ 7% Present Value Dividend 1 667.5 0.935 623.83 Dividend 2 667.5 0.873 583.02 Dividend 3 667.5 0.816 544.88 Dividend 4 667.5 0.763 509.23 Dividend 5 667.5 0.713 475.92 Dividend 6 667.5 0.666 444.78 Dividend 7 667.5 0.623 415.69 Dividend 8 667.5 0.582 388.49 Poceed from the sale of share 8 22500 0.582 13095.20 Total of present value of cash inflow 17,081.05 Present value of cash outflow 15,000.00 Net Present Value 2,081.05

Related Questions

Navigate

• Browse (All)
• Browse O
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.