Sean Laarner paid $18,000 for 900 common shares of Acme Company on January 2 nd

Question

Sean Laarner paid $18,000 for 900 common shares of Acme Company on January 2nd, four years ago. Laarner received $0.80 per share dividend on the shares at the end of each year for four years. At the end of four year, he sold the shares for $22,500. Laarner’s goal is to earn a minimum return of 12% on all of his investments.

(Ignore income taxes) Did Laarner earn a 12% return on the shares? Use the net present value method and the general format. Round all computations to the nearest whole dollar.

Explanation / Answer

NPV=-18000+720/1.12^1+720/1.12^2+720/1.12^3+(720+22500)/1.12^4=-1514

As NPV is negative. he did not earn 12%

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