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	$129,000		$108,000
2	106,000		127,000
3	91,000		87,000
4	83,000		61,000
5	26,000		52,000
Total	$435,000		$435,000

Each project requires an investment of $235,000. 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 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, BLANK the offers a higher BLANK .

Answer 1

Solution

Elite Apparel Inc

1b. computation of the net present value for each project:

	Plant Expansion	Retail Store Expansion
Present Value of net cash flow Total	$346,072	$342,449
Less: Amount to be invested	$235,000	$235,000
Net Present Value	$111,072	$107,449

Computations:

Plant Expansion
Year	0	1	2	3	4	5	Total
Initial Investment	($235,000)						($235,000)
Cash Flow	-	$129,000	$106,000	$91,000	$83,000	$26,000	$435,000
present value factor at 10%	1	0.9091	0.8264	0.7513	0.683	0.6209
present values	($235,000)	$117,274	$87,598	$68,368	$56,689	$16,143	$346,072
Net Present Value = present value of cash flows - present value of initial investment							$111,072

Retail Store Expansion
Year	0	1	2	3	4	5	Total
Initial Investment	($235,000)						($235,000)
Cash Flows	-	$108,000	$127,000	$87,000	$61,000	$52,000	$435,000
present value factor at 10%	1	0.9091	0.8264	0.7513	0.683	0.6209
present values	($235,000)	$98,183	$104,953	$65,363	$41,663	$32,287	$342,449
Net Present Value = present value of cash flows - present value of initial investment							$107,449

Because of the timing of the receipt of the net cash flows, Plant Expansion offers a higher Net Present Value.