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

Fundamentals of Financial Management (MindTap Course List)

15th Edition

ISBN:9781337395250

Author:Eugene F. Brigham, Joel F. Houston

Publisher:Eugene F. Brigham, Joel F. Houston

Chapter12: Cash Flow Estimation And Risk Analysis

Section: Chapter Questions

Problem 11P: REPLACEMENT ANALYSIS St. Johns River Shipyards is considering the replacement of an 8-year-old...

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Question

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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REPLACEMENT ANALYSIS St. Johns River Shipyards is considering the replacement of an 8-year-old riveting machine with a new one that will increase earnings before depreciation from 24,000 to 46,000 per year. The new machine will cost 80,000; and it will have an estimated life of 8 years and no salvage value. The new machine will be depreciated over its 5-year MACRS recovery period, so the applicable depreciation rates are 20%, 32%, 19%, 12%, 11%, and 6%. The applicable corporate tax rate is 40%, and the firm's WACC is 10%. The old machine has been fully depreciated and has no salvage value. Should the old riveting machine be replaced by the new one? Explain your answer.
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