Compare the results of the three (3) methods by quality of information for decision making, assignment week 10 finance

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are three (3) types of textbook based homework items located at the end
of each chapter. These include Discussion Questions (DQ), Exercises
(E), and Problems (P). Some homework items have been custom created.

Complete the following homework scenario:

  • Required:
    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 and previously listed in Week 4) to help you understand the foundational concepts:

    Scenario Information:
    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:

    1. 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.
    2. Net Present Value: Consider the gas station example above under the NPV method, and a discount rate of 10%:
      NPVgas station A = $100,000/(1+.10)2 – $50,000 = $32,644
      NPVgas station B = $50,000/(1+.10) + $25,000/(1+.10)2 – $50,000 = $16,115
    3. 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.

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