Westurn Dynamite Company is evaluating two new methods of blowing up buildings for commercial purposes over the

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Westurn Dynamite Company is evaluating two new methods of blowing up buildings for commercial purposes over the next five years. Method 1 (implosion) is relatively low in risk for this business and will carry a 10 percent discount rate. Method 2 (explosion) is less expensive to perform, but it is more dangerous and will require a higher discount rate of 15 percent. Either method will require an initial capital outlay of $100,000. The inflows from projected business over the next five years are given below. Which method should be selected using NPV analysis?

Years Method 1 Method 2 $25,000 $28,000 30,000 32,000 3 38,000 39,000 31,000 33,000 4 25,000 19,000

Discount Rate
Depending upon the context, the discount rate has two different definitions and usages. First, the discount rate refers to the interest rate charged to the commercial banks and other financial institutions for the loans they take from the Federal...
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Foundations of Financial Management

ISBN: 978-1259024979

10th Canadian edition

Authors: Stanley Block, Geoffrey Hirt, Bartley Danielsen, Doug Short, Michael Perretta

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