# after-tax cash flows

Engineering economy questions. I need to know what formulas I need to use in order to solve the problems as well as how to solve the problems

© BrainMass Inc. brainmass.com June 3, 2020, 11:33 pm ad1c9bdddfhttps://brainmass.com/economics/personal-finance-savings/285540

#### Solution Preview

see the attached file. Thanks

1. An investor purchased 1000 shares of Omega common stock for $15,000. He held the stock for ten years. For the first four years he received annual end-of-year dividends of $1,200. For the next four years he received annual dividends of $1,500. He received $2,000 dividend for the last two years. At the end of the tenth year he sold his stock for $20,000. What rate of return did he receive on his investment? (Try 12%)

First write the cash flows associated with the investment

Year Cash Flow

0 -15000

1 1200

2 1200

3 1200

4 1200

5 1500

6 1500

7 1500

8 1500

9 2000

10 22000 Note: Dividend plus selling price

Now the easiest way to calculate the rate of return is use the IRR function in Excel.

IRR 11.32%

If you are not using IRR then you have to calculate the return by hit and trial method. You have a hint to use 12%, so at 12% calculate the NPV of the investment. If it is greater than 0, increase the discount rate, else decrease the discount rate. We repeat the same till be reach a point where NPV is zero. I am illustrating the process below.

Discount Rate 12%

Year Cash Flow Discount Factor Discounted ...

#### Solution Summary

The after-tax cash flows are calculated.