Question
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
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 company's cost of capital os 10%.
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.
2. Conceptual Connection: 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 NPV.
Please show all work.
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