Question
Part III. Project Selection Garcia Energy has recently experienced a recent surge in demand. In order to be more productive, Garcia Energy is analyzing two
Part III. 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 (3 points; Option A = 2.04 years):
2. Discounted Payback (4 points; Option A = 2.41 years):
3. Net Present Value (2 points; Option A = $67,479):
4. Profitability Index (1 point; Option A = 1.22):
5. Internal Rate of Return (1 point, Option A = 22.0%):
6. Modified Internal Rate of Return (5 points; Option A = 17.46%):
7. In the Executive Summary, based on the information given, which project should be chosen by Garcia Energy? Why? (Hint: Include discussions of time, yield, and dollars) (3 points)
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