I just need you to compare the 3 methods and convey your understanding of time value money. There are no minimum word count. If you can do 1 page that is just fine.
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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
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.
Gas Station A
Gas Station B
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
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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