I need help with this problem. I am assuming I need to evaluate the IRR in order to make a determination on which method to choose based on NPV analysis. How would I do this in an Excel spreadsheet? Additionally, based on NPV analysis why is one method more preferable than the other?
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
The calculation are in the attached file. NPV is calculated using the NPV function in excel. The initial investment is not a part of the NPV calculation in excel and is to be added separately.
If the determination is based on NPV analysis, then there is no need to calculate the IRR ( though I ...
The solution explains how to choose a project based on net present value analysis.