Explore BrainMass

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


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.