Question

Dixie Dynamite Company is evaluating two methods of blowing up old buildings for commercial purposes over...

Dixie Dynamite Company is evaluating two methods of blowing up old buildings for commercial purposes over the next five years. Method one (implosion) is relatively low in risk for this business and will carry a 12 percent discount rate. Method two (explosion) is less expensive to perform but more dangerous and will call for a higher discount rate of 17 percent. Either method will require an initial capital outlay of $80,000. The inflows from projected business over the next five years are shown next.  
  

Years Method 1 Method 2
1 $ 31,700 $ 19,800
2 36,800 30,600
3 46,900 34,500
4 35,200 34,700
5 26,500 70,400

   
Use Appendix B for an approximate answer but calculate your final answers using the formula and financial calculator methods.

Homework Answers

Answer #1

Calculation of NPV of Project using method 1 and 2:

NPV = Present value of cash inflows- initial outlays

Method 1:

Year

Cash Inflows

P.V. factor @ 12% discounting rate

P.V. of Cash inflows

1

31700

0.8929

28303.58

2

36800

0.7972

29336.73

3

46900

0.7118

33382.49

4

35200

0.6355

22370.24

5

26500

0.5674

15036.81

P.V. of total cash inflows

128429.85

= $128429.85-$80000

= $48429.85

Year

Cash Inflows

P.V. factor @ 17% discounting rate

P.V. of Cash inflows

1

19800

0.8547

16923.08

2

30600

0.7305

22353.71

3

34500

0.6244

21540.78

4

34700

0.5337

18517.66

5

70400

0.4561

32110.23

P.V. of total cash inflows

111445.46

= $111445.46-$80000

= $31445.46

Since NPV through Method 2 is higher than Method 1 therefore, Method 2 should be obtained.

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