Question

1. Cash Payback Period, A method of analysis of proposed capital investments that focuses on the present value of the cash flows expected from the investments.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		$450,000			$500,000
   2		450,000			400,000
   3		340,000			350,000
   4		280,000			250,000
   5		180,000			200,000
   Total		$1,700,000			$1,700,000

   Each project requires an investment of $900,000. A rate of 15% 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 2 years 3 years 4 years 5 years
   Retail Store Expansion	1 year 2 years 3 years 4 years 5 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
   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

   • plant expansion
   • retail store expansion
   offers a higher
   • net present value
   • net cash flow
   .

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	$450,000.00	$450,000.00	$500,000.00	$500,000.00
2	$450,000.00	$900,000.00	$400,000.00	$900,000.00
3	$340,000.00	$1,240,000.00	$350,000.00	$1,250,000.00
4	$280,000.00	$1,520,000.00	$250,000.00	$1,500,000.00
5	$180,000.00	$1,700,000.00	$200,000.00	$1,700,000.00

Cash payback period: Plant expansion = 2 years Retail store expansion = 2 years

Solution 2a:
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	$900,000	$900,000	$900,000	$900,000
Present Value of Cash outflows (A)				$900,000		$900,000
Cash Inflows
Year 1	1	0.870	$450,000.00	$391,500	$500,000.00	$435,000
Year 2	2	0.756	$450,000.00	$340,200	$400,000.00	$302,400
Year 3	3	0.658	$340,000.00	$223,720	$350,000.00	$230,300
Year 4	4	0.572	$280,000.00	$160,160	$250,000.00	$143,000
Year 5	5	0.497	$180,000.00	$89,460	$200,000.00	$99,400
Present Value of Cash Inflows (B)				$1,205,040		$1,210,100
Net Present Value (NPV) (B-A)				$305,040		$310,100

Solution 2b:

Because of the timing of the receipt of the net cash flows, the retail store expanstion offers a higher NPV.