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	$130,000		$109,000
2	107,000		128,000
3	92,000		88,000
4	83,000		61,000
5	26,000		52,000
Total	$438,000		$438,000

Each project requires an investment of $237,000. 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	2 years
Retail Store Expansion	2 years

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 plant expansion  offers a higher net present value .

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Answer 1

	Plant Expansion	Retail Store Expansion
Present value of net cash flow total	$334,403	$330,289
Less amount to be invested	$237,000	$237,000
Net present value	$97,403	$93,289

Net Present Value - Plant Expansion

Year	Annual cash inflow ($)	Present Value factor at 12%	Present Value of Annual cash inflow ($)
1	1,30,000	0.893	1,16,090
2	1,07,000	0.797	85,279
3	92,000	0.712	65,504
4	83,000	0.636	52,788
5	26,000	0.567	14,742
TOTAL			334,403

Net Present Value = Present Value of annual cash inflows - Initial Investment

= $334,403 - $237,00

= $97,403

Net Present Value - Retail Store Expansion

Year	Annual cash inflow ($)	Present Value factor at 12%	Present Value of Annual cash inflow ($)
1	1,09,000	0.893	97,337
2	1,28,000	0.797	1,02,016
3	88,000	0.712	62,656
4	61,000	0.636	38,796
5	52,000	0.567	29,484
TOTAL			330,289

Net Present Value = Present Value of annual cash inflows - Initial Investment

= $330,289 - $237,00

= $93,289