Elite Apparel Inc. is considering two investment projects. The estimated net cas

Question

Elite Apparel Inc. is considering 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.

Required:

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

1b. Compute the net present value. Use the present value of $1 table above. If required, round to the nearest dollar.

2. Because of the timing of the receipt of the net cash flows, the

plant expansion

retail store expansion

Year Plant Expansion Retail Store Expansion 1 $ 450,000 $ 500,000 2    450,000    400,000 3    340,000    350,000 4    280,000    250,000 5    180,000    200,000 Total $1,700,000 $1,700,000

Explanation / Answer

1 Payback period Plant Expansion Year Cash Flow Cumulative 0 900000 -900000 1 450000 -450000 2 450000 0 3 340000 340000 4 280000 620000 5 180000 800000 Payback period is 2 years Retail Store Expansion 0 900000 -900000 1 500000 -400000 2 400000 0 3 350000 350000 4 250000 600000 5 200000 800000 Payback period is 2 years Calculation of the Net Present values Plant Expansion Present Value of Net Cash Flows 1 450000 0.87 391500 2 450000 0.756 340200 3 340000 0.658 223720 4 280000 0.572 160160 5 180000 0.497 89460 Present Value of Net Cash Flows 1205040 Amount to be invested 900000 Net Present Value 305040 Retail Store Expansion 1 500000 0.87 435000 2 400000 0.756 302400 3 350000 0.658 230300 4 250000 0.572 143000 5 200000 0.497 99400 Present Value of Net Cash Flows 1210100 Amount to be invested 900000 Net Present Value 310100 Retail Store3 Expansion should be accepted

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