Required information The following information applies to the questions displaye

Question

Required information The following information applies to the questions displayed below. Vern plans to invest $100,000 in a growth stock, in year O. The stock is not expected to pay dividends. However, Vern predicts that it will be worth $135,000 when he sells it in year 3. The $35,000 increase in value will be taxable at the preferential capital gains rate of 15 percent. Use Appendix A and Appendix B a. Using a 4 percent discount rate, calculate the net present value of after-tax cash flows from this investment. (Round discount factor(s) to 3 decimal places. Round your intermediate calculations and final answer to the nearest whole dollar amount.) NPV

Explanation / Answer

Calculation of NPV of Project Particulars Year 4% Factor Amount Present value C D C X D Cash Inflow Sale of Investments 3             0.889 135000              120,015 A. Total Cash Inflow - PV              120,015 Cash Outflow Cost of Investment 0             1.000          100,000              100,000 Tax on Gain - 15% X $35,000 3             0.889               5,250                   4,667 B. Total Cash Outflow - PV              104,667 NPV (A - B)                15,348

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