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	$144,000		$121,000
2	118,000		141,000
3	102,000		97,000
4	92,000		68,000
5	29,000		58,000
Total	$485,000		$485,000

Each project requires an investment of $262,000. 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

• All working forms part of the answer
• Requirement 1 A

Cash Pay Back period = No. of years it will take to recover the amount initially invested.

Amount initially invested = $ 262,000

	Plant Expansion		Retail Store Expansion
Year	Annual Estimated Cash Flows	Cumulative Cash Flows	Annual Estimated Cash Flows	Cumulative Cash Flows
1	$                         144,000.00	$      144,000.00	$     121,000.00	$     121,000.00
2	$                         118,000.00	$      262,000.00	$     141,000.00	$     262,000.00
3	$                         102,000.00	$      364,000.00	$       97,000.00	$     359,000.00
4	$                           92,000.00	$      456,000.00	$       68,000.00	$     427,000.00
5	$                           29,000.00	$      485,000.00	$       58,000.00	$     485,000.00

It is clear from the above table/work sheet that $ 262,000 is recovered UNDER BOTH Project by the end of Year 2.

Hence, Cash payback period for the both the project is 2 years.

Cash Payback Period
Plant Expansion	2 years
Retail Store Expansion	2 years

• Requirement 1 B

Working for calculation of Present value of Net Cash Flow total

		Plant Expansion		Retail Store Expansion
Year	12%	Annual Estimated Cash Flows	Present Values of Cash Flows	Annual Estimated Cash Flows	Present Values of Cash Flows
1	0.893	$      144,000.00	$     128,592.00	$     121,000.00	$     108,053.00
2	0.797	$      118,000.00	$       94,046.00	$     141,000.00	$     112,377.00
3	0.712	$      102,000.00	$       72,624.00	$       97,000.00	$       69,064.00
4	0.636	$        92,000.00	$       58,512.00	$       68,000.00	$       43,248.00
5	0.567	$        29,000.00	$       16,443.00	$       58,000.00	$       32,886.00
		Total Present Value	$        370,217.00	Total Present Value	$        365,628.00

	Plant Expansion	Retail Store Expansion
Present value of net cash flow total (from above working)	$ 370,217	$ 365,628
Less: amount to be invested	$ 262,000	$ 262,000
Net present value	$ 108,217	$ 103,628

• Requirement 2

Because of the timing of the receipt of the net cash flows, the PLANT EXPANSION offers a higher Net Present Value .