Cash Payback Period, A method of analysis of proposed capital investments that focuses on the present value of the cash flows expected from the investments.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 $162,000 $135,000

2 132,000 159,000

3 114,000 109,000

4 103,000 76,000

5 33,000 65,000

Total $544,000 $544,000

Each project requires an investment of $294,000. 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

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

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

plant expansion

retail store expansion

offers a higher

net present value

net cash flow