Chase, Inc. is considering an eight-year project that has an initial after-tax outlay or after-tax cost of $180,000. The future after-tax cash inflows from its project for years 1 through 8 are the same at $35,000
Chase uses the net present value method and has a discount rate of 12%. Will Chase accept the project?
A) Chase accepts the project because the NPV is over $10,000.
B) Chase accepts the project because the NPV is about $6,141.
C) Chase rejects the project because the NPV is about -$6,133.
D) Chase rejects the project because the NPV is below -$7,000.
Answer: C
Explanation: C) The future after-tax cash inflows are an annuity. Thus, we can use:
NPV = -CF0 + . Inserting in the given values gives:
NPV = -$180,000 + = -$180,000 + ($35,000 × 4.967640)
= -$180,000 + $173,867.39 = -$6,132.61. Thus, Chase rejects the project since it has a negative NPV.
Using the NPV function in Excel yields the same answer.
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