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Cornerstones of Managerial Accounting 6th Edition by Maryanne Mowen,Don Hansen ,Dan Heitger
Edition 6ISBN: 978-1305103962Cornerstones of Managerial Accounting 6th Edition by Maryanne Mowen,Don Hansen ,Dan Heitger
Edition 6ISBN: 978-1305103962 Exercise 24
Net Present Value, Basic Concepts
Wise Company is considering an investment that requires an outlay of $600,000 and promises an after-tax cash inflow 1 year from now of $693,000. The company's cost of capital is 10%.
Required:
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 meaning of NPV?
Wise Company is considering an investment that requires an outlay of $600,000 and promises an after-tax cash inflow 1 year from now of $693,000. The company's cost of capital is 10%.
Required:
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 meaning of NPV?
Explanation
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1)
Calculate present value of profit ea...
Cornerstones of Managerial Accounting 6th Edition by Maryanne Mowen,Don Hansen ,Dan Heitger
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