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 to help you understand the foundational concepts:
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.
InvestmentSales PriceCF1CF2Gas Station A$50,000$0$100,000Gas Station B$50,000$50,000$25,000
Three (3) Capital Budgeting Methods are presented:
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
Summary of the Three (3) Methods:
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