Crispen Corporation can invest in a project that costs $400,000.The project is expected to have an after-tax return of $250,000 in each of years 1 and 2.Crispen normally uses a 10 percent discount rate to evaluate projects but feels it should use 12 percent to compensate for inflation.How much difference does the rate make in the after-tax net present value of the project?
A)$50,000
B)$22,500
C)$20,000
D)$11,250

Question

Quizplus · Accepted Answer

The difference in the after-tax net present value (NPV) of the project when using a 12% discount rate instead of a 10% discount rate can be calculated by finding the NPV at both rates and then subtracting the two. At a 10% discount rate, the NPV is calculated as follows:NPV = -400,000 + 250,000 / (1 + 0.10)^1 + 250,000 / (1 + 0.10)^2 = -400,000 + 227,272.73 + 206,611.57 = 33,884.30At a 12% discount rate, the NPV is:NPV = -400,000 + 250,000 / (1 + 0.12)^1 + 250,000 / (1 + 0.12)^2 = -400,000 + 223,214.29 + 199,328.93 = 22,543.22The difference in NPV between using a 12% and a 10% discount rate is 33,884.30 - 22,543.22 = 11,341.08, which is closest to $11,250.

Crispen Corporation Can Invest in a Project That Costs $400,000