Friday, 22 May 2015

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 9 percent discount rate. Method two (explosion) is less expensive to perform but more dangerous and will call for a higher discount rate of 14 percent. Either method will require an initial capital outlay of $102,000. The inflows from projected business over the next five years are given next.

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 9 percent discount rate. Method two (explosion) is less expensive to perform but more dangerous and will call for a higher discount rate of 14 percent. Either method will require an initial capital outlay of $102,000. The inflows from projected business over the next five years are given next.
  
YearsMethod 1Method 2
1$29,700 $22,600 
2 37,300  31,800 
3 44,000  41,900 
4 35,300  33,100 
5 28,400  74,000 

   
 

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.)
   
 
 Net Present Value
  Method 1$  
  Method 2$  


 
b.Which method should be selected using net present value analysis?
    
 Method 1

 
Explanation: