Gerry Company is considering an investment that requires an outlay of $200,000 and promises an after-tax cash inflow one year from now of $231,000. The company's cost of capital is 10 percent.
Required
1. Break the $231,000 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. 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?