Before getting to analyze the feasibility of the two ranking projects based on the capital budgeting methods, it is important to take into account the fact that both gas stations share an equal sales price. From this point, it is certainly the fact that the feasibility of the two investments is beyond their sales price as both depict the same value. If at all the desire to generate profit from the investment and maximizing the investor’s wealth are anything to go by, then an investment in Gas Station A would be more desirable than investment in Gas Station B.
First, taking to account the payback periods, it is quite overt that Gas Station A registers a higher payback period than B. Ideally, it would suffice to infer to this extent that investment in Gas Station B would be more viable due to its one-year payback period compared to B’s two years. However, the payback period is only a point of concern if liquidity is a major point of concern for the investor (Gallagher & Andrew, 1997). Only if the investor has limited resources to make further investments would he focus on recovering the capital investment within a shorter payback period. However, in this instance, that is not the case since the investor is interested in making generating profit in order to maximize their wealth. Taking to account the payback period, therefore, fails to consider the Time Value for Money by ignoring the prospective benefits generated after the payback period, hence lacking efficiency in terms of measuring profitability, which is the investor’s point of concern here.
Delegate your assignment to our experts and they will do the rest.
Second, considering the Net Present Value of the two ranking investments, it would suffice to infer that by Gas Station A registering more than twice B’s Net Present Value makes it a desirable option for investment between the two. It is quite overt how Gas Station A manifests reliability of the future cash inflows that it would generate in the subsequent years, unlike Gas Station B, which is less promising. Gas Station A depicts a higher profitability range that B, which to this extent takes to account the Time Value of Money invested by projecting a greater range of profitability, which would guarantee maximization of the investor’s wealth (Klein, 2008).
Finally, the percentages registered in the Internal Rate of Return place investment in Gas Station A more feasible than investment in B. By registering a greater Internal Rate of Return, Gas Station A presents itself as an investment that is projected to grow at a higher rate. The investment projects a future stable and stronger growth that accounts for time value of money, since the capital invested in it is expected to grow at a higher rate, generate more profit and maximize the investor’s wealth over time; making it the most feasible investment option. The IRR would have only favored B, despite the lower percentage, if the dollar Value for project were higher than A’s. Since they both sell at $50,000, a higher IRR would ideally make Gas Station A more desirable investment.
References
Gallagher, T. J., & Andrew, J. D. (1997). Financial management: principles and practice. New Jersey : Prentice Hall.
Klein, R. (2008). Results without Authority: Controlling a Project When the Team Doesn't Report to You by Tom Kendrick. Journal of Product Innovation Management, 25(1) , 107-108.
