Elite Apparel Inc. is cosidering two investment projects. The estimated net cash
ID: 2456387 • Letter: E
Question
Elite Apparel Inc. is cosidering two investment projects. The estimated net cash flows from each project are as follows:
Each project requires an investment of $900,000. A rate of 15% has been selected for the net present value analysis.
1. Compute the following for each project:
a. Cash payback period.
b. The net present value. Use the present value of $1 table appearig in this chapter.
Present Value of $1 at Compound Interest
0.567
0.402
0.513
0.162
2. Prepare a brief report advising management on the relative merits of each project.
Year Plant Expansion Retail Store ExpansionExplanation / Answer
1)
A)
Plant Expansion
Cash payback period. = 2 years
Retail Store Expansion
Cash payback period. = 2 years
Working
B)
Plant Expansion
Net present value. = 305040
Retail Store Expansion
Net present value = 310100
Working
2. Prepare a brief report advising management on the relative merits of each project.
On the Basis of Cash payback period. there is no relative merits of each project as they are equal but as per net present value , Retail Store Expansion relative merits as its NPV is higher than Plant Expansion , So it would be advisable from NPV point of view that Management should select Retail Store Expansion if the projects are mutually exclusive and should be selected one , If there are enough money to mangement than management should select both project as its both project are having positive NPV
Year Plant Expansion Cumulative Cash Flow Retail Store Expansion Cumulative Cash Flow 0 -900000 -900000 -900000 -900000 1 450000 -450000 500000 -400000 2 450000 0 400000 0 3 340000 340000 350000 350000 4 280000 620000 250000 600000 5 180000 800000 200000 800000 Total 1700000 1700000Related Questions
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