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 $ 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
Each project requires an investment of $900,000. 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 year2 years3 years4 years5 years
Retail Store Expansion < >1 year2 years3 years4 years5 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
Present value of net cash flow total $ $
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

the cash payback period for both projects is 2 years

NPV for plant expansion = $304,707.24

NPV for  Retail Store Expansion = $309,744.41

retail store expansion has the greater NPV

Explanation:

Here is the full question for question 2

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

plant expansion

retail store expansion

has the higher net present value

Payback calculates the amount of time it takes to recover the amount invested in a project from it cumulative cash flows

Please check the attached image for a calculation of how the payback period was calculated.

Net present value is the present value of after tax cash flows from an investment less the amount invested.  

NPV can be calculated using a financial calculator

for Plant Expansion

Cash flow in year 0 = -900,000

Cash flow in year 1 = 450,000

Cash flow in year 2 = 450,000

Cash flow in year 3 = 340,000

Cash flow in year 4 = 280,000

Cash flow in year 5 = 180,000

I = 15%

NPV = $304,707.24

For retail store expansion

Cash flow in year 0 = -900,000

Cash flow in year 1 = 500,000

Cash flow in year 2 = 400,000

Cash flow in year 3 = 350,000

Cash flow in year 4 = 250,000

Cash flow in year 5 = 200,000

I = 15%

NPV = $309,744.41

retail store expansion has the greater NPV

To find the NPV using a financial calculator:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. after inputting all the cash flows, press the NPV button, input the value for I, press enter and the arrow facing a downward direction.  

3. Press compute  

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