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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
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 16 percent. Either method will require an initial capital outlay of $75,000. The inflows from projected business over the next five years are shown next. Years 1 2 3 4 5 Method 1 $18,000 24,000 34,000 26,000 14,000 Method 2 $20,000 25,000 35,000 28,000 15,000 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.) Net Present Value Method 1 Method 2 b. Which method should be selected using net present value analysis? O Method 1 O Method 2 O Neither of these Debby's Dance Studios is considering the purchase of new sound equipment that will enhance the popularity of its aerobics dancing. The equipment will cost $27,900. Debby is not sure how many members the new equipment will attract, but she estimates that her increased annual cash flows for each of the next five years will have the following probability distribution. Debby's cost of capital is 15 percent. Use Appendix D for an approximate answer but calculate your final answers using the formula and financial calculator methods. Cash Flow $4,570 5,550 7.400 9.930 Probability 1 3 4 2 a. What is the expected value of the cash flow? The value you compute will apply to each of the five years. Expected cash flow b. What is the expected net present value? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places.) Net present value c. Should Debby buy the new equipment? O Yes O No Mr. Sam Golff desires to invest a portion of his assets in rental property. He has narrowed his choices down to two apartment complexes, Palmer Heights and Crenshaw Village. After conferring with the present owners, Mr. Golff has developed the following estimates of the cash flows for these properties. Palmer Heights Yearly Aftertax Cash Inflow (in thousands) Probability $ 70 2 75 90 105 110 Crenshaw Village Yearly Aftertax Cash Inflow (in thousands) Probability $ 75 80 90 100 a. Find the expected cash flow from each apartment complex. (Enter your answers in thousands (e.g, $10,000 should be enter as "10").) Expected Cash Flow (in thousands) Palmer Heights Crenshaw Village b. What is the coefficient of variation for each apartment complex? (Do not round intermediate calculations. Round your answers to 3 decimal places.) Coefficient of Variation Palmer Heights Crenshaw Village c. Which apartment complex has more risk? O Palmer Heights Crenshaw Village
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