Question

1. PR.25-02A.ALGO

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 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
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

Ans 1 A
Plant Expansion
Year	Cash Inflow	Cumulative cash flow	Cash Outflow
1	1,67,000	1,67,000	304000
2	1,37,000	3,04,000
3	1,18,000	4,22,000
4	1,07,000	5,29,000
5	33,000	5,62,000
Since in 2 years, cash outflow= cash inflow, therefore, payback period = 2 years
Retail Store Expansion
Year	Cash Inflow	Cumulative cash flow	Cash Outflow
1	1,40,000	1,40,000	304000
2	1,64,000	3,04,000
3	1,12,000	4,16,000
4	79,000	4,95,000
5	67,000	5,62,000
Since in 2 years, cash outflow= cash inflow, therefore, payback period = 2 years
Ans 1B
Plant Expansion
Year	Cash Inflow	PVF @20%	PV of cash inflow
1	1,67,000	0.833	139111
2	1,37,000	0.694	95078
3	1,18,000	0.579	68322
4	1,07,000	0.482	51574
5	33,000	0.402	13266
			367351
Retail Store Expansion
Year	Cash Inflow	PVF @20%	PV of cash inflow
1	1,40,000	0.833	116620
2	1,64,000	0.694	113816
3	1,12,000	0.579	64848
4	79,000	0.482	38078
5	67,000	0.402	26934
			360296
	Plant Expansion	Retail Store Expansion
Present value of net cash flow total	367351	360296
Less amount to be invested	304000	304000
Net present value	63351	56296

Note:- question 2 is not clear. Hence, could not do it.

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