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.

  

Years	Method 1			Method 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:

a.

NPV1 = −$102,000 + ($29,700 / 1.09) + ($37,300 / 1.092) + ($44,000 / 1.093) + ($35,300 / 1.094) + ($28,400 / 1.095)

= $34,083.90

NPV2 = −$102,000 + ($22,600 / 1.14) + ($31,800 / 1.142) + ($41,900 / 1.143) + ($33,100 / 1.144) + ($74,000 / 1.145)

= $28,606.08

   

b.
 

Calculator solution:

Method 1:

Press the following keys: CF, 2nd, CLR WORK.

Calculator displays CFo, enter 102,000 and press +|– press ENTER.

Press down arrow, enter 29,700, and press Enter.

Press down arrow, enter 1, and press Enter.

Press down arrow, enter 37,300, and press Enter.

Press down arrow, enter 1, and press Enter.

Press down arrow, enter 44,000, and press Enter.

Press down arrow, enter 1, and press Enter.

Press down arrow, enter 35,300, and press Enter.

Press down arrow, enter 1, and press Enter.

Press down arrow, enter 28,400, and press Enter.

Press down arrow, enter 1, and press Enter.

Press NPV; calculator shows I = 0; enter 9 and press Enter.

Press down arrow; calculator shows NPV = 0.00.

Press CPT; calculator shows NPV = 34,083.90

  
 

Method 2:

Press the following keys: CF, 2nd, CLR WORK.

Calculator displays CFo, enter 102,000 and press +|– press ENTER.

Press down arrow, enter 22,600, and press Enter.

Press down arrow, enter 1, and press Enter.

Press down arrow, enter 31,800, and press Enter.

Press down arrow, enter 1, and press Enter.

Press down arrow, enter 41,900, and press Enter.

Press down arrow, enter 1, and press Enter.

Press down arrow, enter 33,100, and press Enter.

Press down arrow, enter 1, and press Enter.

Press down arrow, enter 74,000, and press Enter.

Press down arrow, enter 1, and press Enter.

Press NPV; calculator shows I = 0; enter 14 and press Enter.

Press down arrow; calculator shows NPV = 0.00.

Press CPT; calculator shows NPV = 28,606.08

Method1 should be selected because it has the higher NPV.

Appendix Solutions:

a.

Method 1

   

Year	Inflows			PVIF @ 9%			PV
1	$	29,700			.917		$	27,235
2		37,300			.842			31,407
3		44,000			.772			33,968
4		35,300			.708			24,992
5		28,400			.650			18,460
	PV of Inflows						$	136,062
	Investment						−	102,000
	NPV						$	34,062

   

Method 2

   

Year	Inflows			PVIF @ 14%			PV
1	$	22,600			.877		$	19,820
2		31,800			.769			24,454
3		41,900			.675			28,282
4		33,100			.592			19,595
5		74,000			.519			38,406
	PV of Inflows						$	130,558
	Investment						−	102,000
	NPV						$	28,558