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	$109,000		$91,000
2	89,000		107,000
3	77,000		73,000
4	70,000		51,000
5	21,000		44,000
Total	$366,000		$366,000

Each project requires an investment of $198,000. 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	1 yrs, 2yrs,3yrs,4yrs,5yrs?
Retail Store Expansion 1yrs,2yrs,3yrs,4yrs,5yrs??

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/ or retail store expansion?? offers a higher .(Net present value or net cash flow??

Answer 1

using cash payback period
Initial investment	$ 198,000.00
plant expansion
year	cash flow	cumulative cash flow
1	$ 109,000.00	$                   109,000.00
2	$    89,000.00	$                   198,000.00
3	$    77,000.00	$                   275,000.00

cash payback period

2 years

Retail store expansion
year	cash flow	cumulative cash flow
1	$    91,000.00	$                     91,000.00
2	$ 107,000.00	$                   198,000.00
3	$    73,000.00	$                   271,000.00
cash payback period	2 years

From the above,

		Cash payback period
Plant expansion		2 years
Retail store expansion		2 years

1.b solution

Under net present value,

Plant expansion:

year	cash flow(a)	Present value factor@20%(b)	Present value(axb)
1	$ 109,000.00	0.833	$                     90,797.00
2	$    89,000.00	0.694	$                     61,766.00
3	$    77,000.00	0.579	$                     44,583.00
4	$    70,000.00	0.482	$                     33,740.00
5	$    21,000.00	0.402	$                       8,442.00
Present value of net cash flow total			$                   239,328.00

Retail store expansion

year	cash flow(a)	Present value factor@20%(b)	Present value(axb)
1	$    91,000.00	0.833	$                 75,803.00
2	$ 107,000.00	0.694	$                 74,258.00
3	$    73,000.00	0.579	$                 42,267.00
4	$    51,000.00	0.482	$                 24,582.00
5	$    44,000.00	0.402	$                 17,688.00
Present value of net cash flow total			$              234,598.00

	Plant expansion	Retail store expansion
Present value of net cash flow total	$ 239,328.00	$                                    234,598.00
Less amount to be invested	$ 198,000.00	$                                    198,000.00
Net present value(a-b)	$    41,328.00	$                                      36,598.00

2.ans

From the above plant expansion offers a higher net present value/ net cash flow than retail store expansion.