Question

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

Answer 1

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