Compare the results of the three (3) methods by quality of information for decision making Using what you have learned about the three (3) methods, identify the best project by the criteria of long term increase in value (You do not need to do further research ) Convey your understanding of the Time Value of Money principles used or not used in the three (3) methods Review the video titled NPV, IRR, MIRR for Mac and PC Excel (located at https www youtube com watch and previously listed in Week 4) to help you understand the foundational concepts Scenario Information Assume that two gas stations are for sale with the following cash flows CF1 is the Cash Flow in the first year, and CF2 is the Cash Flow in the second year This is the time line and data used in calculating the Payback Period, Net Present Value, and Internal Rate of Return The calculations are done for you Your task is to select the best project and explain your decision The methods are presented and the decision each indicates is given below Investment Sales Price CF1 CF2 Gas Station A $50,000 $0 $100,000 Gas Station B $50,000 $50,000 $25,000 Three (3) Capital Budgeting Methods are presented Payback Period Gas Station A is paid back in 2 years CF1 in year 1, and CF2 in year 2 Gas Station B is paid back in one (1) year According to the payback period, when given the choice between two mutually exclusive projects, the investment paid back in the shortest time is selected Net Present Value Consider the gas station example above under the NPV method, and a discount rate of 10 NPV gas station A $100,000 (1 10) 2 $50,000 $32,644 NPV gas station B $50,000 (1 10) $25,000 (1 10) 2 $50,000 $16,115 Internal Rate of Return Assuming 10 is the cost of funds the IRR for Station A is 41 421 for Station B, 36 602 Summary of the Three (3) Methods Gas Station B should be selected, as the investment is returned in 1 period rather than 2 periods required for Gas Station A Under the NPV criteria, however, the decision favors gas station A, as it has the higher net present value NPV is a measure of the value of the investment The IRR method favors Gas Station A as it has a higher return, exceeding the cost of funds (10 ) by the highest return

The Answer is in the image, click to view ...

Answered step by step

Verified Expert Solution

Link Copied!

Question

1 Approved Answer

Posted on Jun 10, 2024

Compare the results of the three (3) methods by quality of information for decision making. Using what you have learned about the three (3) methods,

Compare the results of the three (3) methods by quality of information for decision making. Using what you have learned about the three (3) methods, identify the best project by the criteria of long term increase in value. (You do not need to do further research.) Convey your understanding of the Time Value of Money principles used or not used in the three (3) methods. Review the video titled NPV, IRR, MIRR for Mac and PC Excel (located at https://www.youtube.com/watch? and previously listed in Week 4) to help you understand the foundational concepts: Scenario Information: Assume that two gas stations are for sale with the following cash flows; CF1 is the Cash Flow in the first year, and CF2 is the Cash Flow in the second year. This is the time line and data used in calculating the Payback Period, Net Present Value, and Internal Rate of Return. The calculations are done for you. Your task is to select the best project and explain your decision. The methods are presented and the decision each indicates is given below.

Investment	Sales Price	CF1	CF2
Gas Station A	$50,000	$0	$100,000
Gas Station B	$50,000	$50,000	$25,000

Three (3) Capital Budgeting Methods are presented:

Payback Period: Gas Station A is paid back in 2 years; CF1 in year 1, and CF2 in year 2. Gas Station B is paid back in one (1) year. According to the payback period, when given the choice between two mutually exclusive projects, the investment paid back in the shortest time is selected.
Net Present Value: Consider the gas station example above under the NPV method, and a discount rate of 10%: NPV_{gas station A} = $100,000/(1+.10)² - $50,000 = $32,644 NPV_{gas station B} = $50,000/(1+.10) + $25,000/(1+.10)² - $50,000 = $16,115
Internal Rate of Return: Assuming 10% is the cost of funds; the IRR for Station A is 41.421%.; for Station B, 36.602.

Summary of the Three (3) Methods:

Gas Station B should be selected, as the investment is returned in 1 period rather than 2 periods required for Gas Station A.
Under the NPV criteria, however, the decision favors gas station A, as it has the higher net present value. NPV is a measure of the value of the investment.
The IRR method favors Gas Station A. as it has a higher return, exceeding the cost of funds (10%) by the highest return.