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 $85,000. The inflows from projected business over the next five years are shown next.  
  

Years	Method 1			Method 2
1	$	30,000		$	20,200
2		30,200			22,100
3		39,300			37,100
4		36,300			29,000
5		25,700			77,100

   
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.)
  

method 1 Net present Value _____________

Method 2 Net present Value ________________

Answer 1

Method I

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

• Press the CF button.
• CF0= -$85,000. 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 $31,486.11.

Method II

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

• Press the CF button.
• CF0= -$85,000. 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 17%.
• Press the down arrow and CPT buttons to get the net present value.

Net Present value of cash flows at 17% discount rate is $22,215.48.

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