Net Present Value, Basic Concepts

For discount factors use Exhibit 12B.1.

Wise Company is considering an investment that requires an outlay of $600,000 and promises an after-tax cash inflow of $693,000 one year from now. The companys cost of capital is 10%.

Required:

1. Break the $693,000 future cash inflow into three components: (a) the return of the original investment, (b) the cost of capital, and (c) the profit earned on the investment. Now compute the present value of the profit earned on the investment. If required, round your answers to the nearest dollar.

(a) Return of the original investment	$fill in the blank 1
(b) Cost of capital	$fill in the blank 2
(c) Profit earned on the investment	$fill in the blank 3

Present value of profit $fill in the blank 4

2. Conceptual Connection: Compute the NPV of the investment. Round present value calculations and your final answer to the nearest dollar. $fill in the blank 5

Compare this with the present value of the profit computed in Requirement 1. What does this tell you about the meaning of NPV?