My question is: Do I include in the cash flow the results of the invested $10,000, or only of the 500 shares. I always OVER THINK on these! Here is the problem:

On January 2, 19X1, Bruce Greene invested $10,000 in the stock market and purchased 500 shares of Heartland Development, Inc. Heartland paid cash dividends of $2.60 per share in 19X1 and 19X2; the dividend was raised to $3.10 per share in 19X3. On December 31, 19X3, Greene sold his holdings and generated proceeds of $13,000. Greene uses the net-present- value method and desires a 16% return on investments.
a. Prepare a chronological list of the investment's cash flows. Note: Greene is entitled to the 19X3 dividend.
b. Compute the investment's net present value, rounding calculations to the nearest dollar.
c. Given the results of part (b), should Greene have acquired the Heartland stock? Briefly explain

Thanks for any help!

What do YOU think ?
While we're happy to HELP we won't do all the work for you.
Show us what you have done and where you are having problems..

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Originally Posted by Curlyben

What do YOU think ?
While we're happy to HELP we wont do all the work for you.
Show us what you have done and where you are having problems..

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While I am thinking I should put both amounts together, like I said, I over think things and feel as if this is a trick question. I have already answered the problems both ways, but do not want to submit wrong totals. I just need clarification on the wording of the problem when it comes to the $10,000. Thanks again for helping.

Yvonne, the initial investment of 10K can be included or excluded as one of the cash flows; the two different approaches only give two versions of the same comparison. It's analogous to the fact that

" a > b" and "a - b > 0" are equivalent statements.

What your problem boils down to is determining if the present value of the sequence of cash inflows generated by the investment is greater than the amount of the initial 10K investment.

One approach is to discount all the cash flows--including the negative cash flow of 10K--at the given required rate of return. Then see if the sum of all the individual present values is > zero. (Remember that the present value of any cash flow occurring immediately is just the amount of the cash flow itself.)

Equivalently, you could just discount all the positive cash flows (i.e. the cash inflows) generated by the investment, and see if the sum of their PVs exceeds the initial investment of 10K.

If you denote the sum of the present values of the cash inflows by "PV", you'll see that the first approach is

PV - 10,000 > 0 ?

... whereas the second approach is

PV > 10,000 ?

and these are equivalent questions.

Quote:

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Originally Posted by ArcSine

Yvonne, the initial investment of 10K can be included or excluded as one of the cash flows; the two different approaches only give two versions of the same comparison. It's analogous to the fact that

" a > b" and "a - b > 0" are equivalent statements.

What your problem boils down to is determining if the present value of the sequence of cash inflows generated by the investment is greater than the amount of the initial 10K investment.

One approach is to discount all the cash flows--including the negative cash flow of 10K--at the given required rate of return. Then see if the sum of all the individual present values is > zero. (Remember that the present value of any cash flow occurring immediately is just the amount of the cash flow itself.)

Equivalently, you could just discount all the positive cash flows (i.e., the cash inflows) generated by the investment, and see if the sum of their PVs exceeds the initial investment of 10K.

If you denote the sum of the present values of the cash inflows by "PV", you'll see that the first approach is

PV - 10,000 > 0 ?

...whereas the second approach is

PV > 10,000 ?

and these are equivalent questions.

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Thank you, ArcSine, this has made me understand the problem better, and now I can finish with it!