NPV: Basic Concepts

Buena Vision Clinic is considering an investment that requires an outlay of $600,000 and promises a net cash inflow one year from now of $810,000. Assume the cost of capital is 10 percent.

The present value tables provided in Exhibit 19B.1 and Exhibit 19B.2 must be used to solve the following problems.

Required:

1. Break the $810,000 future cash inflow into the three components shown below. Enter all your answers as positive amounts.

a. The return of the original investment	$600,000
b. The cost of capital	$60,000
c. The profit earned on the investment	$150,000

2. Now, compute the present value of the profit earned on the investment. $

3. Compute the NPV of the investment. When required, round your answer to the nearest dollar. $

Compare this with the present value of the profit computed in Requirement 2. What does this tell you about the meaning of NPV? Net present value represents the present value of future profits