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	$175,000		$146,000
2	143,000		172,000
3	123,000		118,000
4	112,000		82,000
5	35,000		70,000
Total	$588,000		$588,000

Each project requires an investment of $318,000. A rate of 6% 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
Total present value of net cash flow	$	$
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

Payback period
Plant expansion
Year	Cash flows	Cumulative Cf
0	-318000		-318000
1	175000		-143000
2	143000		0
3	123000		123000
4	112000		235000
5	35000		270000
Payback period = 2 years
Retail Store expansion
Year	Cash flows	Cumulative Cf
0	-318000		-318000
1	146000		-172000
2	172000		0
3	118000		118000
4	82000		200000
5	70000		270000
Payback period = 2 years
Net Present value
Plant expansion
Year	Cash flows	PVF at 6%	Present value
1	175000	0.943	165025
2	143000	0.89	127270
3	123000	0.84	103320
4	112000	0.792	88704
5	35000	0.747	26145
Present value of cash flows	510464
Retail store expansion
Year	Cash flows	PVF at 6%	Present value
1	146000	0.943	137678
2	172000	0.89	153080
3	118000	0.84	99120
4	82000	0.792	64944
5	70000	0.747	52290
Present value of cash flows	507112
			Plant	Store
Present value of cash flows	510464	507112
Less: Investment		318000	318000
Net Present value		192464	189112
Because of timing of receipt of net cash flows, the Plant expansion offer higher NPV