Question

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	$105,000		$88,000
2	86,000		103,000
3	74,000		71,000
4	67,000		49,000
5	21,000		42,000
Total	$353,000		$353,000

Each project requires an investment of $191,000. 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	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 offers a higher .

Answer 1

1a)	Payback period
	Plant Expansion
Year	Cash Flow		Cumulative
0	191000		-191,000
1	105000		-86,000
2	86000		0
3	74000		74,000
4	67000		141,000
5	21000		162,000
	Payback period is 2 years
	Retail Store Expansion
0	191000		-191,000
1	88000		-103,000
2	103,000		0
3	71,000		71,000
4	49,000		120,000
5	42,000		162,0000
	Payback period is 2 years
	1b)
	Calculation of the Net Present values		Plant Expansion
	Present Value of Net Cash Flows
1	105000	0.943	99015
2	86000	0.890	76540
3	74000	0.840	62160
4	67000	0.792	53064
5	21000	0.747	15687
	Present Value of Net Cash Flows		306466
	Amount to be invested		191,000
	Net Present Value		115466
	Retail Store Expansion
1	88000	0.943	82,984
2	103,000	0.890	91,670
3	71,000	0.840	59,640
4	49,000	0.792	38,808
5	42,000	0.747	31,374
	Present Value of Net Cash Flows		304,476
	Amount to be invested		191,000
	Net Present Value		113,476
	2 Plant Expansion should be accepted because the net Present value is higher than the Retail expansion .