Question

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	$128,000		$107,000
2	105,000		126,000
3	91,000		86,000
4	82,000		60,000
5	25,000		52,000
Total	$431,000		$431,000

Each project requires an investment of $233,000. A rate of 15% 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	$	$

Answer 1

1a) Cash payback period :

	Plant expansion		Retail store expansion
Year 1	128000	128000	107000	107000
Year 2	105000	233000	126000	233000
Year 3	91000	324000	86000	319000
Year 4	82000	406000	60000	379000
Year 5	25000	431000	52000	431000

Cash payback period :

Plant expansion = 2 Years

Retail Store expansion = 2 years

1b) Net present value = Present value of cash inflow-Present value of cash outflow

  

	Plant Expansion	Retail Store Expansion
Present value of net cash flow total	309947	305098
Less amount to be invested	233000	233000
Net present value	76947	72098