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Gee Company is considering an investment that requires an outlay of $100,000 and promises an after-tax cash

Question:

Gee Company is considering an investment that requires an outlay of $100,000 and promises an after-tax cash inflow one year from now of $115,500. The company’s cost of capital is 10 percent.

Required:
1. Break the $115,500 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.
2. Compute the NPV of the investment. Compare this with the present value of the profit computed in Requirement 1. What does this tell you about the meaning of NPV?

Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...
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1 a Return of the original investment 100000 b Cost of capital 100000 10 10000 c ...View the full answer


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NPV stands for \"Net Present Value,\" which is a financial concept used to determine the value of an investment or project. It measures the difference between the present value of cash inflows and the present value of cash outflows over a given period of time, using a specific discount rate. To calculate the NPV of an investment, you need to first estimate the cash inflows and outflows associated with the investment, and then discount them back to their present values using a discount rate. The discount rate represents the cost of capital or the expected rate of return required by investors. The formula for calculating NPV is: NPV = sum of (cash inflows / (1 + discount rate)^t) - sum of (cash outflows / (1 + discount rate)^t) Where: Cash inflows: the expected cash received from the investment Cash outflows: the expected cash paid out for the investment Discount rate: the required rate of return or the cost of capital t: the time period in which the cash flow occurs If the NPV is positive, it means that the investment is expected to generate a return higher than the required rate of return or the cost of capital, and it may be considered a good investment. If the NPV is negative, it means that the investment is not expected to generate a return higher than the required rate of return or the cost of capital, and it may be considered a bad investment.

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