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 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	1 year
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	$	$

Answer 1

Solution 1a:

Computation of Cumulative Cash flows
Period	Plant expansion		Retail Store expansion
	Cash inflows	Cumulative Cash Inflows	Cash inflows	Cumulative Cash Inflows
1	$130,000.00	$130,000.00	$109,000.00	$109,000.00
2	$107,000.00	$237,000.00	$128,000.00	$237,000.00
3	$92,000.00	$329,000.00	$88,000.00	$325,000.00
4	$83,000.00	$412,000.00	$61,000.00	$386,000.00
5	$26,000.00	$438,000.00	$52,000.00	$438,000.00

Cash payback period:

Plant Expansion = 2 years

Retail Store Expansion = 2 years

Solution 1b:

Computation of NPV - Elite Apparel Inc.
Particulars	Period	PV Factor	Plant expansion		Retail Store expansion
			Amount	Present Value	Amount	Present Value
Cash outflows:
Cost of Equipment	0	1	$237,000	$237,000	$237,000	$237,000
Present Value of Cash outflows (A)				$237,000		$237,000
Cash Inflows
Year 1	1	0.909	$130,000.00	$118,170	$109,000.00	$99,081
Year 2	2	0.826	$107,000.00	$88,382	$128,000.00	$105,728
Year 3	3	0.751	$92,000.00	$69,092	$88,000.00	$66,088
Year 4	4	0.683	$83,000.00	$56,689	$61,000.00	$41,663
Year 5	5	0.621	$26,000.00	$16,146	$52,000.00	$32,292
Present Value of Cash Inflows (B)				$348,479		$344,852
Net Present Value (NPV) (B-A)				$111,479		$107,852