Part III. Project Selection

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RAVI has recently experienced a surge in demand for one product line. To be more productive, RAVI is analyzing two potential expansion projects. Option B is costlier but provides larger cash inflows. Project A and Project B are mutually exclusive projects.$$ Carlos Ruiz believes this decision's impact will extend to three years.$$ RAVI$$s required return on this project is $10$ percent.$$ 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 when you have an incorrect final answer.

Option A

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Option B

Initial Investment: $$310,000$

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Initial Investment: $$450,000$

Year

Cash Inflow

$$

Year

Cash Inflow

$1$

$$151,790$

$$

$1$

$$210,000$

$2$

$$151,790$

$$

$2$

$$190,000$

$3$

$$151,790$

$$

$3$

$$180,000$

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PART A$.$ Capital Budgeting

$1.$ Payback Method $(2$ points; Option A $=2\mathrm{.}04$ years$)$:

$2.$ Discounted Payback $(3$ points; Option A $=2\mathrm{.}41$ years$)$:

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

$4.$ Profitability Index $(1$ point; Option A $=1\mathrm{.}22)$:

$5.$ Internal Rate of Return $(1$ point, Option A $=22\mathrm{.}0\%)$:

$6.$ Modified Internal Rate of Return $(4$ points; Option A $=17\mathrm{.}46\%)$:

$7.$ In the Executive Summary, based on the information given and your computations, identify the project that RAVI should choose.$$ Why? $($Hint:$$ Include discussions of time, yield, and dollars$)(3$ points$)$