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	$169,000		$142,000
2	139,000		166,000
3	120,000		114,000
4	108,000		80,000
5	34,000		68,000
Total	$570,000		$570,000

Each project requires an investment of $308,000. 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
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

Solution 1a:
Computation of Cumulative Cash flows
Period	Plant expansion	Retail Store expansion
Cash inflows	Cumulative Cash Inflows	Cash inflows	Cumulative Cash Inflows
1	$169,000.00	$169,000.00	$142,000.00	$142,000.00
2	$139,000.00	$308,000.00	$166,000.00	$308,000.00
3	$120,000.00	$428,000.00	$114,000.00	$422,000.00
4	$108,000.00	$536,000.00	$80,000.00	$502,000.00
5	$34,000.00	$570,000.00	$68,000.00	$570,000.00

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

Solution 1b:

Solution 2:

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