Complete the following homework scenario:
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
...
Complete the following homework scenario:
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?v=C7CryVgFbBc 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 timeline 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.
Question: What is a drawback(s) of using the Payback
Period Method?
ANSWER: BOTH B AND C: THE PAYBACK PERIOD METHOD
IGNORES THE TIME VALUE OF MONEY AND THE PAYBACK
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PERIOD METHOD IGNORES ALL CASH FLOWS BEYOND THE
PAYBACK PERIOD.
Question 2
10 out of 10 points
Complete the following homework scenario:
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?v=C7CryVgFbBc 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 timeline 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
[Show More]
