In: Finance
7. What is the NPV of a $5000 investment that is worth $10,000 at the of five years, if we wanted to earn 15% on the investment?
Did we earn our required 15% How can you tell?
8. What is the present value of a stock that pays a $1 dividend in perpetuity, if you wish to earn a 10% return? What would you be willing to pay for the stock?
7. You are considering buying stock in a company that currently pays a $1 annual dividend. The dividend is expected to increase by 3% annually in perpetuity, and you wish to earn a 12% return on the investment. How much would you be willing to pay for the stock?
Investment amount | $5,000.00 | |||||
Time period = | 5 | |||||
Required rate of return 15% or | 0.15 | |||||
Value of investment at end of years | (Future value) | $10,000.00 | ||||
Present value = Future value / (1+r)^n | ||||||
10000 /(1+0.15)^5 | ||||||
$ 4,971.77 | ||||||
NPV of investment = Present worth of investment - investment amount | ||||||
$ 4,971.77 | -$5,000.00 | |||||
$ -28.23 | ||||||
NPV is $-28.23. So investment should not be done. | ||||||
No, we did not earn 15% on our investment. | ||||||
If we earn 15% investment, Future value of our investment would be in 5 Years : | ||||||
5000 *(1+0.15)^5 | ||||||
10056.7859 | ||||||
Our future value of investment should be $10,056.79 at 15% interest rate. But Future value of our investment is $10,000 only. | ||||||
So, we did not earn 15% on our investment. |