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ID: 2616095 • Letter: H
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HOMEWORK If you need help submitting assignments, please click here for more information. There 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 https://www.youtube.com/watch?vE 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 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 Sales Price $50,000 $50,000 CF1 $0 $50,000 CF2 100,000 $25,000 Investment Gas Station A Gas Station BExplanation / Answer
All the calculations relating to both the projects have already been provided in the question. We need to make a decision based on this information.
We will select Gas Station A for investment. It is because it provides a higher NPV than Gas Station B. NPV is considered as the most reliable method for evaluating any investment proposal as it takes into account the time value of money and can be measured in absolute terms at varying discount rates. Further, IRR of Gas Station A is higher than that of Gas Station B.
Payback period is not a suitable method for evaluating investment proposals as it doesn't consider the time value of money. It ignores the cash flows that may occur after the investment has recovered, that is, after the payback period. A more appropriate measure would be to calculate the discounted payback period which will take into account the time value of money.
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