Question

Cash Payback Period, Net Present Value Method, and Analysis

Elite Apparel Inc. is considering two investment projects. The estimated net cash flows from each project are as follows:

Year	Plant Expansion		Retail Store Expansion
1	$138,000		$115,000
2	113,000		136,000
3	97,000		93,000
4	88,000		65,000
5	28,000		55,000
Total	$464,000		$464,000

Each project requires an investment of $251,000. A rate of 12% has been selected for the net present value analysis.

Present Value of $1 at Compound Interest
Year	6%	10%	12%	15%	20%
1	0.943	0.909	0.893	0.870	0.833
2	0.890	0.826	0.797	0.756	0.694
3	0.840	0.751	0.712	0.658	0.579
4	0.792	0.683	0.636	0.572	0.482
5	0.747	0.621	0.567	0.497	0.402
6	0.705	0.564	0.507	0.432	0.335
7	0.665	0.513	0.452	0.376	0.279
8	0.627	0.467	0.404	0.327	0.233
9	0.592	0.424	0.361	0.284	0.194
10	0.558	0.386	0.322	0.247	0.162

Required:

1a. Compute the cash payback period for each project.

	Cash Payback Period
Plant Expansion
Retail Store Expansion

1b. Compute the net present value. Use the present value of $1 table above. If required, round to the nearest dollar.

	Plant Expansion	Retail Store Expansion
Present value of net cash flow total	$	$
Less amount to be invested	$	$
Net present value	$	$

2. Because of the timing of the receipt of the net cash flows, the   offers a higher  

Answer 1

1a
	Cash Payback Period
Plant Expansion	2 years	=2 (138000+113000)
Retail Store Expansion	2 years	=2 (115000+136000)
1b
	Plant Expansion	Retail Store Expansion
Present value of net cash flow total	354203	349828
Less amount to be invested	251000	251000
Net present value	103203	98828
2
Because of the timing of the receipt of the net cash flows, the Plant Expansion offers a higher Net present value
Workings:
	Plant Expansion			Retail Store Expansion
	Cash flows	PV factor 12%	Present value	Cash flows	PV factor 12%	Present value
1	138000	0.893	123234	115000	0.893	102695
2	113000	0.797	90061	136000	0.797	108392
3	97000	0.712	69064	93000	0.712	66216
4	88000	0.636	55968	65000	0.636	41340
5	28000	0.567	15876	55000	0.567	31185
		Total	354203		Total	349828