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	$173,000		$144,000
2	141,000		170,000
3	122,000		116,000
4	110,000		81,000
5	35,000		70,000
Total	$581,000		$581,000

Each project requires an investment of $314,000. 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 product.

	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

1a
	Cash Payback Period
Plant Expansion	2 years	=173000+141000
Retail Store Expansion	2 years	=144000+170000
1b
	Plant Expansion	Retail Store Expansion
Present value of net cash flow total	419107	412950
Less amount to be invested	314000	314000
Net present value	105107	98950
2
Because of the timing of the receipt of the net cash flows, the Plant Expansion offers a higher net present value.
Workings:
	Plant Expansion			Retail Store Expansion
Year	Cash flows	PV factor 15%	Present value	Cash flows	PV factor 15%	Present value
1	173000	0.870	150510	144000	0.870	125280
2	141000	0.766	108006	170000	0.766	130220
3	122000	0.658	80276	116000	0.658	76328
4	110000	0.572	62920	81000	0.572	46332
5	35000	0.497	17395	70000	0.497	34790
		Total	419107		Total	412950