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 11 percent discount rate. Method two (explosion) is less expensive to perform but more dangerous and will call for a higher discount rate of 15 percent. Either method will require an initial capital outlay of $112,000. The inflows from projected business over the next five years are shown next. Years 1234 in 5 Method 1 $ 32,300 32,600 40,900 37,800 21,400 Method 2 $ 19,000 31,000 38,300 34,800 72,900
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 11 percent discount rate. Method two (explosion) is less expensive to perform but more dangerous and will call for a higher discount rate of 15 percent. Either method will require an initial capital outlay of $112,000. The inflows from projected business over the next five years are shown next. Years 1234 in 5 Method 1 $ 32,300 32,600 40,900 37,800 21,400 Method 2 $ 19,000 31,000 38,300 34,800 72,900
Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Eugene F. Brigham, Phillip R. Daves
Chapter13: Capital Budgeting: Estimating Cash Flows And Analyzing Risk
Section: Chapter Questions
Problem 4P
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![Problem 13-14 (Algo) Risk-adjusted discount rate [LO13-3]
Dixie Dynamite Company is evaluating two methods of blowing 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 11 percent discount rate. Method two (explosion) is less
expensive to perform but more dangerous and will call for a higher discount rate of 15 percent. Either method will require an initial
capital outlay of $112,000. The inflows from projected business over the next five years are shown next.
Years
2
3
4
5
Method 1
$ 32,300
32,600
40,900
37,800
21,400
Method 1
Method 2
Method 2
$ 19,000
31,000
38,300
34,800
72,900
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.
Note: Do not round intermediate calculations and round your answers to 2 decimal places.
Net Present Value
b. Which method should be selected using net present value analysis?
O Method 1
O Method 2
O Neither of these](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fcb9d508d-aef1-44f9-a221-45a82708bb38%2Ff967349b-e223-4276-98d6-fbd35da7fa9a%2Fortelbh_processed.png&w=3840&q=75)
Transcribed Image Text:Problem 13-14 (Algo) Risk-adjusted discount rate [LO13-3]
Dixie Dynamite Company is evaluating two methods of blowing 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 11 percent discount rate. Method two (explosion) is less
expensive to perform but more dangerous and will call for a higher discount rate of 15 percent. Either method will require an initial
capital outlay of $112,000. The inflows from projected business over the next five years are shown next.
Years
2
3
4
5
Method 1
$ 32,300
32,600
40,900
37,800
21,400
Method 1
Method 2
Method 2
$ 19,000
31,000
38,300
34,800
72,900
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.
Note: Do not round intermediate calculations and round your answers to 2 decimal places.
Net Present Value
b. Which method should be selected using net present value analysis?
O Method 1
O Method 2
O Neither of these
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