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 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

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.

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