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	$111,000		$93,000
2	91,000		109,000
3	79,000		75,000
4	71,000		52,000
5	22,000		45,000
Total	$374,000		$374,000

Each project requires an investment of $202,000. 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	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
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  offers a higher net present value .

Answer 1

1. Payback period is the time period within which initial investment is received back in form of cash flow.

a.Plant exposion

Year	Plant Expansion	Cummulative cash flow
1	$111,000	$111,000
2	91,000	$202,000[$111,000+91,000]
3	79,000	$281,000
4	71,000	$352,000
5	22,000	$374,000 [$352,000+$71,000]

Payback period = year before full recovery + unrecovered cash flow/cash flow in next period

As we can see that cumulative cash flow in year 2 = initial outlay

so payback period is 2 years

b.Retail store

		Retail Store Expansion	Cumulative cash flow
1		$93,000	$93,000
2		109,000	$202,000
3		75,000
4		52,000
5		45,000
Total		$374,000

Payback period = year before full recovery + unrecovered cash flow/cash flow in next period

As we can see that cumulative cash flow in year 2 = initial outlay

so payback period is 2 years

1b.NPV = -Initial Outlay+Present value of cash flow

	Plant Expansion	Retail Store Expansion
Total present value of net cash flow	$268,894	$264,773
Less amount to be invested	$202,000	$202,000
Net present value	$66,894[268,894-202,000]	$62,773[$264,773-202,000]

Present value at 15%

Year	PV factor at 15%	Plant Expansion	Present value of cash flow(Plant exposion)	Retail Store Expansion	Present value of cash flow(Retail store)
1	0.870	$111,000	$96,570($111,000*0.870)	$93,000	$80,910($93,000*0.870)
2	0.756	91,000	$68,796($91,000*0.756)	109,000	$82,404($109,000*0.756)
3	0.658	79,000	$51,982($79,000*0.658)	75,000	$49,350($75,000*0.658)
4	0.572	71,000	$40,612($71,000*0.575)	52,000	$29,744($52,000*0.572)
5	0.497	22,000	$10,934($22,000*0.497)	45,000	$22,365($45,000*0.497)
Total		$374,000	$268,894	$374,000	$264,773

2. sooner the money is recieved higher is the value as it can be reinvested at given rate of interest

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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