Dixie Dynamite Company is evaluating two methods of blowing up old buildings for commercial purposes over...

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Dixie Dynamite Company is evaluating two methods of blowing upold buildings for commercial purposes over the next five years.Method one (implosion) is relatively low in risk for this businessand will carry a 12 percent discount rate. Method two (explosion)is less expensive to perform but more dangerous and will call for ahigher discount rate of 17 percent. Either method will require aninitial capital outlay of $110,000. The inflows from projectedbusiness over the next five years are shown 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 finalanswers using the formula and financial calculator methods.

a. Calculate net present value for Method 1 andMethod 2. (Do not round intermediate calculations and roundyour answers to 2 decimal places.)


b. Which method should be selected using netpresent value analysis?
Method 1
Method 2
Neither of these

Answer & Explanation Solved by verified expert

3.8 Ratings (731 Votes)

Net Present Value NPV Method 1 Implosion Year Annual cash inflow Present Value factor at 1200 Present Value of annual cash inflow 1 33800 0892857 3017857 2 33200 0797194 2646684 3 42100 0711780 2996595 4 See Answer

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Dixie Dynamite Company is evaluating two methods of blowing upold buildings for commercial purposes over the next five years.Method one (implosion) is relatively low in risk for this businessand will carry a 12 percent discount rate. Method two (explosion)is less expensive to perform but more dangerous and will call for ahigher discount rate of 17 percent. Either method will require aninitial capital outlay of $110,000. The inflows from projectedbusiness over the next five years are shown next. YearsMethod 1Method 21$33,800$18,800233,20029,500342,10038,100434,80038,600519,20071,200 Use Appendix B for an approximate answer but calculate your finalanswers using the formula and financial calculator methods.a. Calculate net present value for Method 1 andMethod 2. (Do not round intermediate calculations and roundyour answers to 2 decimal places.) b. Which method should be selected using netpresent value analysis?Method 1Method 2Neither of these

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