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 15 percent. Either method will require an initial capital outlay of $112,000. The inflows from projected business over the next five years are shown next.

Years             Method 1        Method 2

1                   $ 32,300           $ 19,000

2                       32,600           31,000

3                     40,900           38,300

4                         37,800         34,800

5                       21,400          72,900

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.)

Method 1____________

Method 2 ____________

Answer 1

a.

Method 1:

	11.0000%
Cash flows	Year	Discounted CF
(112,000.00)	0	-112000.00
32,300.00	1	29099.10
32,600.00	2	26458.89
40,900.00	3	29905.73
37,800.00	4	24900.03
21,400.00	5	12699.86

NPV = 11,063.61

Method 2:

	15.0000%
Cash flows	Year	Discounted CF
(112,000.00)	0	-112000.00
19,000.00	1	16521.74
31,000.00	2	23440.45
38,300.00	3	25182.87
34,800.00	4	19897.01
72,900.00	5	36244.18

NPV = 9286.26

Discounted cash flow = cash flow/(1 + rate)^n