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 lessexpensive to perform but more dangerous and will call for a higher discount rate of 17 percent. Either method will require an initialcapital outlay of $80,000. The inflows from projected business over the next five years are shown next.Years12345Method 1$ 31,70036,80046,90035,20026,500Method 1Method 2Method 2$ 19,80030,60034,50034,70070,400Use 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 Valueanalysis?

Net Present value = Present value of Future cash flows - Initial cash outflowPresent value = Future…

Answered: Dixie Dynamite Company is evaluating…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter11: Capital Budgeting And Risk

Section: Chapter Questions

Problem 13P

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Friedman Company is considering installing a new IT system. The cost of the new system is estimated to be 2,250,000, but it would produce after-tax savings of 450,000 per year in labor costs. The estimated life of the new system is 10 years, with no salvage value expected. Intrigued by the possibility of saving 450,000 per year and having a more reliable information system, the president of Friedman has asked for an analysis of the projects economic viability. All capital projects are required to earn at least the firms cost of capital, which is 12 percent. Required: 1. Calculate the projects internal rate of return. Should the company acquire the new IT system? 2. Suppose that savings are less than claimed. Calculate the minimum annual cash savings that must be realized for the project to earn a rate equal to the firms cost of capital. Comment on the safety margin that exists, if any. 3. Suppose that the life of the IT system is overestimated by two years. Repeat Requirements 1 and 2 under this assumption. Comment on the usefulness of this information.
Gina Ripley, president of Dearing Company, is considering the purchase of a computer-aided manufacturing system. The annual net cash benefits and savings associated with the system are described as follows: The system will cost 9,000,000 and last 10 years. The companys cost of capital is 12 percent. Required: 1. Calculate the payback period for the system. Assume that the company has a policy of only accepting projects with a payback of five years or less. Would the system be acquired? 2. Calculate the NPV and IRR for the project. Should the system be purchasedeven if it does not meet the payback criterion? 3. The project manager reviewed the projected cash flows and pointed out that two items had been missed. First, the system would have a salvage value, net of any tax effects, of 1,000,000 at the end of 10 years. Second, the increased quality and delivery performance would allow the company to increase its market share by 20 percent. This would produce an additional annual net benefit of 300,000. Recalculate the payback period, NPV, and IRR given this new information. (For the IRR computation, initially ignore salvage value.) Does the decision change? Suppose that the salvage value is only half what is projected. Does this make a difference in the outcome? Does salvage value have any real bearing on the companys decision?
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…
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 8 percent discount rate. Method two (explosion) is less expensive to perform but more dangerous and will call for a higher discount rate of 12 percent. Either method will require an initial capital outlay of $99,000. The inflows from projected business over the next five years are shown next. Years Method 1 Method 2 1 $33,500 $19,000 2 38,000 27, 200 3 44,300 4 34,400 5 24,600 39,600 35,300 77,500 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
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…
Jazz town, Inc., is considering a new product launch. The firm expects to have an annual operating cash flow of $9.0 million for the next 9 years. The discount rate for this project is 12 percent for new product launches. The initial investment is $37.5 million. Assume that the project has no salvage value at the end of its economic life. After the first year, the project can be dismantled and sold for $26.1 million. If the estimates of remaining cash flows are revised based on the first year’s experience, at what level of expected cash flows does it make sense to abandon the project?
Agate Marketing Inc. intends to distribute a new product. It is expected to produce net returns of $13,000 per year for the first four years and $11,000 per year for the following three years. The facilities required to distribute the product will cost $36,000, with a disposal value of $9,600 after seven years. The facilities will require a major facelift costing $10,000 each after three years and after five years. If Agate requires a return on investment of 15%, should the company distribute the new product? If NPV is negative your answer must include the negative sign. Net Present Value (NPV) = Should the decision be Accept or Reject? Fir
Halloween, Inc., is considering a new product launch. The firm expects to have an annual operating cash flow of $9.0 million for the next 9 years. The discount rate for this project is 12 percent for new product launches. The initial investment is $37.5 million. Assume that the project has no salvage value at the end of its economic life. A) What is the NPV of the new product? B) After the first year, the project can be dismantled and sold for $26.1 million. If the estimates of remaining cash flows are revised based on the first year’s experience, at what level of expected cash flows does it make sense to abandon the project?
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 16 percent. Either method will require an initial capital outlay of 102,000. The inflows from projected business over the next five years are shown next. [[Years, Method 1, Method 2,11,32,100,17,600
A marketing company intends to distribute a new product. It is expected to produce net returns of $16,000 per year for the first four years and $15,000 per year for the following three years. The facilities required to distribute the product will cost $70,000 with a disposal value of $13,000 after seven years. The facilities will require a major facelift costing $11,000 each after three years and after five years. If the company requires a return on investment of 10%, should the company distribute the new product? The company distribute the new product.
Halloween, Incorporated, is considering a new product launch. The firm expects to have an annual operating cash flow of $8.1 million for the next 8 years. The discount rate for this project is 12 percent for new product launches. The initial investment is $38.1 million. Assume that the project has no salvage value at the end of its economic life. a. What is the NPV of the new product? . B.After the first year, the project can be dismantled and sold for $25.1 million. If the estimates of remaining cash flows are revised based on the first year’s experience, at what level of expected cash flows does it make sense to abandon the project?

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