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	$102,000		$85,000
2	83,000		100,000
3	72,000		68,000
4	65,000		48,000
5	20,000		41,000
Total	$342,000		$342,000

Each project requires an investment of $185,000. 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
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   offers a higher  .

Answer 1

1a
	Cash Payback Period
Plant Expansion	2 years	(102000+83000) = 185000
Retail Store Expansion	2 years	(100000+85000) = 185000
1b
	Plant Expansion	Retail Store Expansion
Present value of net cash flow total	272163	269178
Less amount to be invested	185000	185000
Net present value	87163	84178
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 10%	Present value
1	102000	0.909	92718
2	83000	0.826	68558
3	72000	0.751	54072
4	65000	0.683	44395
5	20000	0.621	12420
		Total	272163
	Retail Store Expansion
	Net cash flows	PV factor 10%	Present value
1	85000	0.909	77265
2	100000	0.826	82600
3	68000	0.751	51068
4	48000	0.683	32784
5	41000	0.621	25461
		Total	269178