Complete the following homework scenario:Required:Compare the results of the three (3) methods by qualityof information for decision making. Using what you have learned aboutthe three (3) methods, identify the best project by the criteria of longterm increase in value. (You do not need to do further research.)Convey your understanding of the Time Value of Money principles used ornot 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:Assumethat two gas stations are for sale with the following cash flows; CF1is the Cash Flow in the first year, and CF2 is the Cash Flow in thesecond year. This is the time line and data used in calculating thePayback Period, Net Present Value, and Internal Rate of Return. Thecalculations are done for you. Your task is to select the best projectand explain your decision. The methods are presented and the decisioneach indicates is given below.InvestmentSales PriceCF1CF2Gas Station A$50,000$0$100,000Gas Station B$50,000$50,000$25,000Three (3) Capital Budgeting Methods are presented:Payback Period: Gas Station A is paid back in 2years; CF1 in year 1, and CF2 in year 2. Gas Station B is paid back inone (1) year. According to the payback period, when given the choicebetween two mutually exclusive projects, the investment paid back in theshortest time is selected.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 = $32,644NPVgas station B = $50,000/(1+.10) + $25,000/(1+.10)2 – $50,000 = $16,115Internal 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 ofthe investment.The IRR method favors Gas Station A. as it has a higher return, exceeding the cost of funds (10%) by the highest return.
