Help wiht Economic Income

CFA Level II Corporate Finance
#1

I’m struggling to understand economic income…I know that economic income in a given year should be the cash flow generated minus the change in economic value of the investment, why doesnt the calculation includes the initial outlay???

Take for example EOC #13 of reading 25. On the answers, when doing the calculation of V0 they only discount the cash flows of 85, and forget to include the original 100 of initial outlay… could you help me to understand why?

#2

Initial outlay occurs at time t=0 and is not part of the first years cash flows. It would however be considered as part of an NPV calculation.

#3

“economic income in a given year should be the cash flow generated minus the change in economic value of the investment”

…so initial outlay comes in as pat of economic value.