Reference no: EM131196604
Finance Homework Scenario
Complete the following homework scenario:
• Required:
Compare the results of the three methods by quality of information for decision making. Using what you have learned about the three 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 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 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 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:
o Gas Station B should be selected, as the investment is returned in 1 period rather than 2 periods required for Gas Station A.
o 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.
o The IRR method favors Gas Station A. as it has a higher return, exceeding the cost of funds (10%) by the highest return.
Explain two financial career options that an individual
: Describe two financial career options that an individual with a finance education might pursue and explain the value that such a position adds to a company.
|
Find the expected value and variance of weekly cpu time
: The CPU time costs the firm $200 per hour. Find the expected value and variance of the weekly cost for CPU time.
|
Wage rate is determined by wage
: Suppose your wage rate is determined by WAGE = −19.68 + 2.52EDUC + 0.55EXPER − 0.007EXPER2 where EDUC is years of schooling and EXPER is years of work experience. Using calculus, what value of EXPER maximizes WAGE for a person with 16 years of educat..
|
Demonstrate advanced written and oral communication skills
: Demonstrate advanced written and oral communication skills by preparing and presenting professional documentation that is tailored to a specific audience - demonstrate the ability to organise and contribute to a project in a group environment
|
Explain the best project by criteria of long term increase
: Compare the results of the three methods by quality of information for decision making. Using what you have learned about the three methods, identify the best project by the criteria of long term increase in value.
|
What are three basic laws of geometric optics
: What are three basic laws of geometric optics? - Proof refraction law by using Fermat's principle. - Two flat mirrors have an angle 45 deg. Please find the number of images in this case.
|
Define role of medical assistant in today healthcare office
: After reviewing the section on medical assisting in the course textbook, briefly describe the role of the medical assistant in today's healthcare office. This section should be 5-6 sentences in length. How could training as a medical assistant be ..
|
Is the euro trading at forward premium or discount
: Assume that the eurozone risk free interest rate n bonds with one year to maturity is 4.78 percent and the U.S. risk free rate on one year bonds is 3.15 percent. The currenct exchangerate is $0.90 per euro. assume the US is the domestic country. calc..
|
What value of k will maximize his expected daily profit
: The grocer wants to order 100k of food on a certain day. He buys the food at 6¢ per pound and sells it at 10¢ per pound. What value of k will maximize his expected daily profit?
|