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 11 percent discount rate. Method two (explosion)
is less expensive to perform but more dangerous and will call for a
higher discount rate of 16 percent. Either method will require an
initial capital outlay of $110,000. The inflows from projected
business over the next five years are shown next.
|Years||Method 1||Method 2|
Use Appendix B for an approximate answer but calculate your final answers using the formula and financial calculator methods.
a. Calculate net present value for Method 1 and Method 2.(Do not round intermediate calculations and round your answers to 2 decimal places.)
b. Which method should be selected using net present value analysis?
|Neither of these
Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period
Present value of inflows=34400/1.11+35400/1.11^2+40900/1.11^3+34100/1.11^4+27400/1.11^5
NPV=Present value of inflows-Present value of outflows
Present value of inflows=20200/1.16+26800/1.16^2+40600/1.16^3+34400/1.16^4+79100/1.16^5
Hence Method 1 must be selected having higher NPV.
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