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	$145,000		$121,000
2	119,000		143,000
3	102,000		98,000
4	93,000		68,000
5	29,000		58,000
Total	$488,000		$488,000

Each project requires an investment of $264,000. A rate of 6% 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
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   offers a higher  .

Answer 1

Answer-1-a)-Cash payback period- Plant Expansion = 2 years.

Retail Store Expansion = 2 years.

Explanation- Payback period is the time in which the initial cash outflow of an investment is expected to be recovered from the cash inflows generated by the investment. It is one of the simplest investment appraisal techniques.

When cash inflows are uneven, then calculate cumulative net cash flow for each period and

Then use the following formula for payback period:

Payback period =A+B/C Where:-A is the last period with a negative cumulative cash flow; B is the absolute value of cumulative cash flow at the end of the period A; C is the total cash flow during the period after A Plant Expansion= 1 years + ($119000/$119000) = 2 years Retail Store Expansion= 1 years + ($143000/$143000) = 2 years

1-b)-

Particulars	Plant Expansion	Retail Store Expansion
	$	$
Total present value of net cash flow	423644	420875
Less- Amount to be invested	264000	264000
Net Present Value $	159644	156875

Explanation-

Calculation of Net Present Value
Plant Expansion
Year	Net Cash Flows (a)	Present Value of 1 at 6% (b)	Present Value of cash flows (c=a*b)
Year 1	145000	0.943	136735
Year 2	119000	0.890	105910
Year 3	102000	0.840	85680
Year 4	93000	0.792	73656
Year 5	29000	0.747	21663
Totals
Total present value of cash inflow (a)			423644
Total cash outflow (b)			264000
Net Present Value (c=a-b)			159644
Calculation of Net Present Value
Retail Store Expansion
Year	Net Cash Flows (a)	Present Value of 1 at 6% (b)	Present Value of cash flows (c=a*b)
Year 1	121000	0.943	114103
Year 2	143000	0.890	127270
Year 3	98000	0.840	82320
Year 4	68000	0.792	53856
Year 5	58000	0.747	43326
Totals
Total present value of cash inflow (a)			420875
Total cash outflow (b)			264000
Net Present Value (c=a-b)			156875

2)-Because of the timing of the receipts of the net cash flows, the plant expansion offers a higher net present value.