Question

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?

Answer 1

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.