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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):

Payback method = 2 + (440,000 - 400,000) / 180,000 = 2.22

2. Discounted Payback (4 points; Option A = 2.41 years):

Discounted payback = 2 (440,000 - 347,933.88) / 135,236.66 = 2.68

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

NPV = (10% + 210,000 +190,000 + 180,000) + (440,000)

NPV = $43,170.55

4. Profitability Index (1 point; Option A = 1.22):

PI = PV of cash inflows / PV of cash outflows

PI = $483,170.55/($440,000)

PI = 1.10

5. Internal Rate of Return (1 point, Option A = 22.0%):

IRR = 15.65%

6. Modified Internal Rate of Return (5 points; Option A = 17.46%):

MIRR = 13.49%

Question to be Answered:

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)

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