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 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 | ||||

1 | $ | 34,400 | $ | 20,200 | ||

2 | 35,400 | 26,800 | ||||

3 | 40,900 | 40,600 | ||||

4 | 34,100 | 34,400 | ||||

5 | 27,400 | 79,100 | ||||

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?

Method 1 | |

Method 2 | |

Neither of these |

Answer #1

Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period

Method1:

Present value of inflows=34400/1.11+35400/1.11^2+40900/1.11^3+34100/1.11^4+27400/1.11^5

=$128351.45

NPV=Present value of inflows-Present value of outflows

=$128351.45-$110000

=**$18351.45**

Method 2:

Present value of inflows=20200/1.16+26800/1.16^2+40600/1.16^3+34400/1.16^4+79100/1.16^5

=$120,000.61

NPV =$120,000.61-$110,000

**=$10,000.61**

**Hence Method 1 must be selected having higher
NPV.**

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...

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 $93,000. The inflows from projected
business over the next five...

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 $102,000. The inflows from projected
business over the next five...

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 $110,000. The inflows from projected
business over the next five...

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 $102,000. The inflows from projected
business over the next five...

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