Question

1. Cash Payback Period, A method of analysis of proposed capital investments that focuses on the present value of the cash flows expected from the investments.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	$149,000		$125,000
   2	122,000		146,000
   3	105,000		100,000
   4	95,000		70,000
   5	30,000		60,000
   Total	$501,000		$501,000

   Each project requires an investment of $271,000. 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	1 year 2 years 3 years 4 years 5 years
   Retail Store Expansion	1 year 2 years 3 years 4 years 5 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
   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

   • plant expansion
   • retail store expansion
   offers a higher
   • net present value
   • net cash flow

Answer 1

1a
	Cash Payback Period
Plant Expansion	2 years	(149000+122000)
Retail Store Expansion	2 years	(125000+146000)
1b
	Plant Expansion	Retail Store Expansion
Total present value of net cash flow	360202	354786
Less amount to be invested	271000	271000
Net present value	89202	83786
2
Because of the timing of the receipt of the net cash flows, the plant expansion offers a higher net present value
Workings:
	Plant Expansion			Retail Store Expansion
	Cash flows	PV factor 15%	Present value	Cash flows	PV factor 15%	Present value
1	149000	0.870	129630	125000	0.870	108750
2	122000	0.756	92232	146000	0.756	110376
3	105000	0.658	69090	100000	0.658	65800
4	95000	0.572	54340	70000	0.572	40040
5	30000	0.497	14910	60000	0.497	29820
		Total	360202		Total	354786