Question
Roboto Company is considering an investment that requires an outlay of $450,000 and promises an after-tax cash inflow one year from now of $505,029. The
Roboto Company is considering an investment that requires an outlay of $450,000 and promises an after-tax cash inflow one year from now of $505,029. The company's cost of capital is 8 percent.
Required:
1. Break the $505,029 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.
(a) Return of the original investment | $ |
(b) Cost of capital | $ |
(c) Profit earned on the investment | $ |
Round your answer to whole dollar amount. Present value of profit:
2. 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?
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