Cash Payback Period, Net Present Value Method, and Analysis Elite Apparel Inc. i
ID: 2437576 • Letter: C
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:
Each project requires an investment of $198,000. A rate of 20% 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/ or retail store expansion?? offers a higher .(Net present value or net cash flow??
Year Plant Expansion Retail Store Expansion 1 $109,000 $91,000 2 89,000 107,000 3 77,000 73,000 4 70,000 51,000 5 21,000 44,000 Total $366,000 $366,000Explanation / Answer
using cash payback period
Initial investment
$ 198,000.00
plant expansion
year
cash flow
cumulative cash flow
1
$ 109,000.00
$ 109,000.00
2
$ 89,000.00
$ 198,000.00
3
$ 77,000.00
$ 275,000.00
Retail store expansion
year
cash flow
cumulative cash flow
1
$ 91,000.00
$ 91,000.00
2
$ 107,000.00
$ 198,000.00
3
$ 73,000.00
$ 271,000.00
cash payback period
2 years
From the above,
Cash payback period
Plant expansion
2 years
Retail store expansion
2 years
1.b solution
Under net present value,
Plant expansion:
year
cash flow(a)
Present value factor@20%(b)
Present value(axb)
1
$ 109,000.00
0.833
$ 90,797.00
2
$ 89,000.00
0.694
$ 61,766.00
3
$ 77,000.00
0.579
$ 44,583.00
4
$ 70,000.00
0.482
$ 33,740.00
5
$ 21,000.00
0.402
$ 8,442.00
Present value of net cash flow total
$ 239,328.00
Retail store expansion
year
cash flow(a)
Present value factor@20%(b)
Present value(axb)
1
$ 91,000.00
0.833
$ 75,803.00
2
$ 107,000.00
0.694
$ 74,258.00
3
$ 73,000.00
0.579
$ 42,267.00
4
$ 51,000.00
0.482
$ 24,582.00
5
$ 44,000.00
0.402
$ 17,688.00
Present value of net cash flow total
$ 234,598.00
Plant expansion
Retail store expansion
Present value of net cash flow total
$ 239,328.00
$ 234,598.00
Less amount to be invested
$ 198,000.00
$ 198,000.00
Net present value(a-b)
$ 41,328.00
$ 36,598.00
2.ans
From the above plant expansion offers a higher net present value/ net cash flow than retail store expansion.
using cash payback period
Initial investment
$ 198,000.00
plant expansion
year
cash flow
cumulative cash flow
1
$ 109,000.00
$ 109,000.00
2
$ 89,000.00
$ 198,000.00
3
$ 77,000.00
$ 275,000.00
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