Question

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.

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.