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 16 percent. Either method will require an initial capital outlay of $107,000. The inflows from projected business over the next five years are shown next.  
  

Years	Method 1			Method 2
1	$	34,100		$	19,700
2		37,900			31,500
3		39,900			40,500
4		39,700			38,800
5		24,400			77,000

   
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.)
  

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

	Method 1
	Method 2
	Neither of these

Answer 1

Method 1

Net present value is solved using a financial calculator. The steps to solve on the financial calculator:

• Press the CF button.
• CF0= -$107,000. It is entered with a negative sign since it is a cash outflow.
• Cash flow for all the years should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow, press the NPV button and enter the discount rate of 12%.
• Press the down arrow and CPT buttons to get the net present value.

Net Present value of cash flows at 12% discount rate is $21,135.39.

Method 2

Net present value is solved using a financial calculator. The steps to solve on the financial calculator:

• Press the CF button.
• CF0= -$107,000. It is entered with a negative sign since it is a cash outflow.
• Cash flow for all the years should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow, press the NPV button and enter the discount rate of 16%.
• Press the down arrow and CPT buttons to get the net present value.

Net Present value of cash flows at 16% discount rate is $17,428.62.

Method 1 would be selected using the net present value analysis since it has the highest net present value.

                      

In case of any query, kindly comment on the solution.