Dixie Dynamite Company is evaluating two methods of blowing up old buildings for
ID: 2769378 • Letter: D
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 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 years are given next. Years Method 1 Method 2 1 $ 33,800 $ 18,800 2 33,200 29,500 3 42,100 38,100 4 34,800 38,600 5 19,200 71,200 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?
Explanation / Answer
Answer:a
Answer:b Method 1
Discount rate 12% 17% Year Method 1 Method 2 0 -110000 -110000 1 33800 18800 2 33200 29500 3 42100 38100 4 34800 38600 5 19200 71200 NPV 9621.98 4481.05