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Koral Corporation can invest in a project that costs $400,000. The project is expected to have...

Koral 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. Koral 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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Answer #1
Ans. Calculation of Net present value of the project:
Year Cash Flow PV factor at 10% PV factor at 12% PV of CI at 10% PV of CI at 12%
0 $ (400,000) 1 1 $      (400,000) $      (400,000)
1        250,000 0.90909 0.89286 $ 227,272.73 $ 223,214.29
2        250,000 0.82645 0.79719 $ 206,611.57 $ 199,298.47
NPV $     33,884.30 $     22,512.76
Diiiference in Present value of the project after tax is $ 11,372
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