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 $143,000 $120,000 2 117,000 140,000 3 101,000 96,000 4 91,000 67,000 5 29,000 58,000 Total $481,000 $481,000 Each project requires an investment of $260,000. 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 product. 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 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 plant expansion offers a higher net present value .

Answer 1

1a
a	Cash payback period
Plant expansion	2 years	(143000+117000)
Retail store expansion	2 years	(120000+140000)
b
	Plant expansion	Retail store expansion
Present value of net cash flow total	382642	378595
Less amount to be invested	260000	260000
Net present value	122642	118595
2
Because of timing of receipt of net cash flows, the plant expansion offers a higher net present value
Workings:
	Plant expansion			Retail store expansion
	Cash flows	PV factor 10%	Present value	Cash flows	PV factor 10%	Present value
1	143000	0.909	129987	120000	0.909	109080
2	117000	0.826	96642	140000	0.826	115640
3	101000	0.751	75851	96000	0.751	72096
4	91000	0.683	62153	67000	0.683	45761
5	29000	0.621	18009	58000	0.621	36018
		Total	382642		Total	378595