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

question 6

Multiple Choice

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

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Definitions:

Neutral

A term indicating impartiality or lack of bias, often used in various contexts.

Monetary Unit Assumption

Accounting information should be measured and reported in the national monetary unit without any adjustments for changes in purchasing power.

National Monetary Unit

The primary currency of a country, used as a medium of exchange and basis for trade.

Purchasing Power

The value of currency expressed in terms of the amount of goods or services that one unit of money can buy.