Question

1. 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	$142,000		$119,000
   2	117,000		140,000
   3	101,000		96,000
   4	91,000		67,000
   5	28,000		57,000
   Total	$479,000		$479,000

   Each project requires an investment of $259,000. A rate of 20% 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

1a
a	Cash payback period
Plant expansion	2 years	(142000+117000)
Retail store expansion	2 years	(119000+140000)
b
	Plant expansion	Retail store expansion
Present value of net cash flow total	313081	307079
Less amount to be invested	259000	259000
Net present value	54081	48079
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 20%	Present value	Cash flows	PV factor 20%	Present value
1	142000	0.833	118286	119000	0.833	99127
2	117000	0.694	81198	140000	0.694	97160
3	101000	0.579	58479	96000	0.579	55584
4	91000	0.482	43862	67000	0.482	32294
5	28000	0.402	11256	57000	0.402	22914
		Total	313081		Total	307079