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	$113,000		$95,000
2	93,000		111,000
3	80,000		76,000
4	72,000		53,000
5	23,000		46,000
Total	$381,000		$381,000

Each project requires an investment of $206,000. A rate of 10% 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

Requirement 1a
	Plant Expansion		Retail Store Expansion
Year	Cash flows	Cumulative cash flows	Cash flows	Cumulative cash flows
0	-206000	-206000	-206000	-206000
1	113000	-93000	95000	-111000
2	93000	0	111000	0
3	80000		76000
4	72000		53000
5	23000		46000
Cash payback period of Plant expansion = 2 years
Cash payback period of Retail store expansion = 2 years
Requirement 1b
		Plant Expansion		Retail Store Expansion
Year	PV factor @ 10%	Cash flows	Present value of cash flows	Cash flows	Present value of cash flows
1	0.909	113000	102717	95000	86355
2	0.826	93000	76818	111000	91686
3	0.751	80000	60080	76000	57076
4	0.683	72000	49176	53000	36199
5	0.621	23000	14283	46000	28566
Present value of net cash flow total			303074		299882
Less: Amount to be invested			206000		206000
Net Present value			97074		93882
Requirement 2
Because of the timing of the receipt of the net cash flows, the Plant expansion offers a higher.