Question

# Elite Apparel Inc. is considering two investment projects. The estimated net cash flows from each project...

1. 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 \$118,000 \$98,000 2 96,000 116,000 3 83,000 79,000 4 75,000 55,000 5 24,000 48,000 Total \$396,000 \$396,000

Each project requires an investment of \$214,000. 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 product.

 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 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

1a. Compute the cash payback period for each product.

 Cash Payback Period Plant Expansion 2 years Retail Store Expansion 2 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 Present value of net cash flow total \$258773 \$253685 Less amount to be invested -214000 -214000 Net present value \$44773 \$39685

2. Because of the timing of the receipt of the net cash flows, the

plant expansion

offers a higher net present value

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