Problem:
Dixie Dynamite Company is evaluating two methods of blowing up old building 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 $75,000. The inflows from projected business over the next five years are given below. Which method should be selected using net present value analysis?
Years Method 1 Method 2
1 $18,000 $20,000
2 24,000 25,000
3 34,000 35,000
4 26,000 28,000
5 14,000 15,000