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	$167,000		$140,000
2	137,000		164,000
3	118,000		112,000
4	107,000		79,000
5	33,000		67,000
Total	$562,000		$562,000

Each project requires an investment of $304,000. 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 product. 1, 2, 3, 4, or 5 years.

	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
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 PLANT EXPANSION / RETAIL STORE EXPANSION offers a higher NET PRESENT VALUE / NET CASH FLOW .

Answer 1

1a
	Cash Payback Period
Plant Expansion	2 years	(167000+137000) = 304000
Retail Store Expansion	2 years	(140000+164000) = 304000
1b
	Plant Expansion	Retail Store Expansion
Present value of net cash flow total	487926	484677
Less amount to be invested	304000	304000
Net present value	183926	180677
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
	Net cash flows	PV factor 6%	Present value
1	167000	0.943	157481
2	137000	0.890	121930
3	118000	0.840	99120
4	107000	0.792	84744
5	33000	0.747	24651
		Total	487926
	Retail Store Expansion
	Net cash flows	PV factor 6%	Present value
1	140000	0.943	132020
2	164000	0.890	145960
3	112000	0.840	94080
4	79000	0.792	62568
5	67000	0.747	50049
		Total	484677