Finance Assignment
Complete the following scenario:
Compare the results of the three methods by quality of information for decision making. Using what you have learned about the three 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 methods. Review the video titled "NPV, IRR, MIRR for Mac and PC Excel" 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.
InvestmentSales PriceCF1CF2 Gas Station A $50,000 $0$100,000 Gas Station B $50,000 $50,000 $25,000
Three Capital Budgeting Methods are presented:
I. 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 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.
II. Net Present Value: Consider the gas station example above under the NPV method, and a discount rate of 10%:
1. NPV gas station A = $100,000/(1+.10)2 - $50,000 = $32,644
2. NPV gas station B = $50,000/(1+.10) + $25,000/(1+.10)2 - $50,000 = $16,115
III. 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 Methods:
I. Gas Station B should be selected, as the investment is returned in 1 period rather than 2 periods required for Gas Station A.
II. 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.
III. The IRR method favors Gas Station A, as it has a higher return, exceeding the cost of funds (10%) by the highest return.
Format your assignment according to the give formatting requirements:
a. The answer must be double spaced, typed, using Times New Roman font (size 12), with one-inch margins on all sides.
b. The response also includes a cover page containing the title of the assignment, the course title, the student's name, and the date. The cover page is not included in the required page length.
c. Also include a reference page. The references and Citations should follow APA format. The reference page is not included in the required page length.