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.

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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