Carl is unsure of which rate he should use as a discount rate for project evaluations, 7 percent or 10 percent.If he can invest $30,000 in a project that will return $40,000 after-tax in four years, what is the result?
A)He will always reject the project
B)He will reject the project if he uses 10%
C)He will reject the project if he uses 7%
D)He will reject neither project

Question

Quizplus · Accepted Answer

Using the Net Present Value (NPV) formula, we can calculate the present value of the $40,000 return for both discount rates. At 7%, the present value is approximately $30,477. At 10%, it's about $27,355. Since Carl is considering investing $30,000, the project's NPV is positive at 7% (making it acceptable) and negative at 10% (leading to rejection).

Carl Is Unsure of Which Rate He Should Use as a Discount