II. Project Selection

Garcia Energy has recently experienced a recent surge in demand. In order to be more productive, Garcia Energy is analyzing two potential expansion projects. Option B is more costly but provides larger cash inflows. Project A and Project B are mutually-exclusive projects. Andrew Potts believes that the impact of this decision will extend out to three years. Garcia Energys required return on this project is 10 percent. Computations for Option A are provided. Complete the analysis for Option B, which is over $100,000 more costly, and identify the project that should be selected. Show work to get partial credit in situations where you have incorrect final answer.

Option A			Option B
Initial Investment: $310,000			Initial Investment: $440,000
Year	Cash Inflow		Year	Cash Inflow
1	$151,790		1	$210,000
2	$151,790		2	$190,000
3	$151,790		3	$180,000

PART A. Capital Budgeting

1. Payback Method (4 points; Option A = 2.04 years):

2. Discounted Payback (5 points; Option A = 2.41 years):

3. Net Present Value (2 points; Option A = $67,479):

4. Profitability Index (1.5 point; Option A = 1.22):

5. Internal Rate of Return (1.5 point, Option A = 22.0%):

6. Modified Internal Rate of Return (6 points; Option A = 17.46%):

7. Discuss the advantages and disadvantages of each measure, including a discussion of why a given option would be preferred on the basis of this capital budgeting tool. (6 points)

8. In the Executive Summary, based on the information given, which project should be chosen by Garcia Energy? Why (2 points)