Question

Cash Payback Period, Net Present Value Method, and Analysis Elite Apparel Inc. is considering two investment...

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 $160,000 $133,000
2 130,000 157,000
3 113,000 107,000
4 102,000 75,000
5 32,000 65,000
Total $537,000 $537,000

Each project requires an investment of $290,000. 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
Total present value of net cash flow $ $
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  .

Homework Answers

Answer #1

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

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
Total present value of net cash flow $427221 $422526
Less amount to be invested -290000 -290000
Net present value $137221 $132526

2. Because of the timing of the receipt of the net cash flows, the plant expansion offers a higher  .

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