Question

Kathy Myers frequently purchases stocks and bonds, but she is uncertain how to determine the rate of return that she is earning. For example, three years ago she paid $15,000 for 890 shares of Malti Company’s common stock. She received a $668 cash dividend on the stock at the end of each year for three years. At the end of three years, she sold the stock for $18,000. Kathy would like to earn a return of at least 14% on all of her investments. She is not sure whether the Malti Company stock provided a 14% return and would like some help with the necessary computations. (Ignore income taxes.) Required: a. Enter the Excel inputs below to be used to calculate the present value of the cash inflows from the investment. b. Calculate the present value of the cash inflows from the investment and the net present value of the investment. (Any cash outflows should be indicated by a minus sign. Use Microsoft Excel to calculate present values and do not round intermediate calculations.) c. Did Kathy Myers earn at least a 14% return on her investment? Yes No d. Enter the Excel formula inputs and calculate the Internal Rate of Return for Kathy's investment.

Answer 1

Year	Inflows	PV Factor@ 14%	Present Value
1	668	0.87719	585.96
2	668	0.76947	514.00
3	18668	0.67497	12,600.37
Present Value of Cash Inflows			13,700.34
Less: Initial Outflow			15,000.00
Net Present Value			(1,299.66)

Since the NPV is negative at the required rate of return of 14%, the Investment has not given the 14% required Rate of Return.

The IRR = 10.47%.

Year	Cashflows
0	(15,000.00)
1	668.00
2	668.00
3	18,668.00
IRR	10.47%

I have used the formula of IRR to calculate the IRR in Excel.

So the Kathy has received the return of 10.47% against expectation of 14%.

Dear Student,

Best effort has been made to give quality and correct answer. But if you find any issues please comment your concern. I will definitely resolve your query.