91%(217)197 out of 217 people found this document helpful
This preview shows page 1 - 2 out of 2 pages.
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 inthe 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 = $32,644NPVgas station B= $50,000/(1+.10) + $25,000/(1+.10)2- $50,000 = $16,1153.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:1.Gas Station B should be selected, as the investment is returned in 1 period rather than 2 periods required for Gas Station A.2.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.3.The IRR method favors Gas Station A. as it has a higher return, exceeding the cost of funds (10%) by the highest return.
Answer: I would go with Gas Station A due to the fact that it has the highest net present value but it has a higher rate of return. So while yes it may take longer to get the initial investment in the long run more money will be made with gas station A versus B.