logo
call

Chat with support 24/7

1-239-690-6577

Professional Custom Essay Writing Service

Order from the best essay help service in the whole world!

...content here............

fhw10

Bottomline: You are given all the solutions. As a financial manager, your objective is to use the capital budgeting tools to determine which project is the best one to accept. Please remember – there is no perfect answer. Some students can choose A, while others choose B. The main questions you should consider: 1)What does the investor want or need? 2) Which project will maximize the investor’s wealth? 3) Which project is the best choice in the long run? Once you understand this piece, your decision may seem simpler.

 

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?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 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.

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:

  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 selected.
  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

Need a Professional Writer to Work on Your Paper and Give you Original Paper? CLICK HERE TO GET THIS PAPER WRITTEN

Place a custom essay order similar to this or any related topic. NB: The assignment paper will be written from scratch as per your instructions and it will be 100% original. It will pass all plagiarism check.

endwhile; ?>

Check Our Prices

Free Quote

 

TRACK YOUR ORDER

All kinds of papers in all subject areas

We can successfully deal with all kinds of school assignments corresponding to various academic disciplines. Among these school papers are:

  • Custom essays
  • Dissertations and theses (undergraduate, Master's, PhD)
  • Research and term papers
  • Courseworks and case studies
  • Admission essays and personal statements, etc.
University of Nairobi