Foundations of Financial Management
16th Edition
ISBN: 9781259277160
Author: Stanley B. Block, Geoffrey A. Hirt, Bartley Danielsen
Publisher: McGraw-Hill Education
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Question
Chapter 13, Problem 14P
Summary Introduction
To determine: The method that should be selected on the basis of NPV.
Introduction:
It is the difference between the PV (present value) of
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Students have asked these similar questions
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 $80,000. The inflows from projected business over the next five years are shown next.
Years
1
2
3
4
5
Method 1
$ 31,700
36,800
46,900
35,200
26,500
Method 1
Method 2
Method 2
$ 19,800
30,600
34,500
34,700
70,400
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
analysis?
Appendix B Present value of $1, PV,
PV = FV
(1+ 0".
Percent
Period
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
11%
12%
1
0.990
0.980
0.971
0.962
0.952
0.943
0.935
0.926
0.917
0.909
0.901
0.893
2
0.980
0.961
0.943
0.925
0.907
0.890
0.873
0.857
0.842
0.826
0.812
0.797
0.971
0.942
0.915
0.889
0.864
0.840
0.816
0.794
0.772
0.751
0.731
0.712
0.961
0.924
0.888
0.855
0.823
0.792
0.763
0.735
0.708
0.683
0.659
0.636
0.951
0.906
0.863
0.822
0.784
0.747
0.713
0.681
0.650
0.621
0.593
0.567
6
0.942
0.888
0.837
0.790
0.746
0.705
0.666
0.630
0.596
0.564
0.535
0.507
7
0.933
0.871
0.813
0.760
0.711
0.665
0.623
0.583
0.547
0.513
0.482
0.452
0.923
0.853
0.789
0.731
0.677
0.627
0.582
0.540
0.502
0.467
0.434
0.404
0.914
0.837
0.766
0.703
0.645
0.592
0.544
0.500
0.460
0.424
0.391
0.361
10
0.905
0.820
0.744
0.676
0.614
0.558
0.508
0.463
0.422
0.386
0.352
0.322
11
0.896
0.804
0.722
0.650
0.585
0.527
0.475
0.429
0.388
0.350
0.317
0.287
12
0.887
0.788
0.701
0.625
0.557
0.497
0.444
0.397
0.356
0.319
0.286
0.257
0.879
0.773…
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 13 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 $92,000. The inflows from projected business over the next five years are shown next.
Years Method 1 Method 2
1
2
3
4
5
$31,100 $20,800
37,200
24,400
44,600
42,200
38,800
37,300
19,200
70,900
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. (Do not round intermediate calculations and round your answers to 2
decimal places.)
Method 1
Method 2
Net Present Value
b. Which method should be selected using net present value analysis?
Method 1…
Chapter 13 Solutions
Foundations of Financial Management
Ch. 13 - Prob. 1DQCh. 13 - Discuss the concept of risk and how it might be...Ch. 13 - When is the coefficient of variation a better...Ch. 13 - Explain how the concept of risk can be...Ch. 13 - If risk is to be analyzed in a qualitative way,...Ch. 13 - Assume a company, correlated with the economy, is...Ch. 13 - Assume a firm has several hundred possible...Ch. 13 - Explain the effect of the risk-return trade-off on...Ch. 13 - What is the purpose of using simulation analysis?...Ch. 13 - Assume you are risk-averse and have the following...
Ch. 13 - Myers Business Systems is evaluating the...Ch. 13 - Prob. 3PCh. 13 - Prob. 4PCh. 13 - Prob. 5PCh. 13 - Possible outcomes for three investment...Ch. 13 - Prob. 7PCh. 13 - Prob. 8PCh. 13 - Prob. 9PCh. 13 - Prob. 10PCh. 13 - Prob. 12PCh. 13 - Waste Industries is evaluating a 70,000 project...Ch. 13 - Prob. 14PCh. 13 - Debby’s Dance Studios is considering the...Ch. 13 - Prob. 17PCh. 13 - Prob. 18PCh. 13 - Allison’s Dresswear Manufacturers is preparing a...Ch. 13 - Prob. 20PCh. 13 - Prob. 21PCh. 13 - Prob. 22PCh. 13 - Ms. Sharp is looking at a number of different...Ch. 13 - Prob. 25P
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