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	$159,000		$133,000
2	130,000		156,000
3	112,000		107,000
4	102,000		75,000
5	32,000		64,000
Total	$535,000		$535,000

Each project requires an investment of $289,000. A rate of 12% 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	2 years (CORRECT)
Retail Store Expansion	2 years (CORRECT)

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	$	$

Feedback:

1a. For each project, start with year 1 and accumulate the net cash flows until the amount to be invested is reached.

1b. For each project, multiply the present value factor for each year (Refer to Exhibit 2 in the text) by that year's net cash flow. Subtract the amount to be invested from the total present value of the net cash flow. Which project offers the more favorable net present value?

2. Consider when cash flows are received and the time value of money.