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Cash payback period, net present value method, and analysis

Apparel Inc. is considering two investment projects. The estimated net cash flows from each project are as follows:

http://sjc.cengagenow.com/ilrn/books/wrfm10h/images/ch25/wrfm10h_ch25_pr25_2b.gif

Each project requires an investment of $480,000. 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

 

 

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

 

 

Cash payback period

Plant Expansion: 1, 2,3.4, or 5yrs ?

 

Retail Store Expansion: 1,2,3,4, 5yrs?

 

 

Answer:

 

Plan expansion Payback Period is in 3 Years

 

 

 

 

Retail Store Expansion Payback Period is in 3 Years

 

 

 

1. B.  Compute the net present value. Use the present value of $1 table above. If required, use the minus sign to indicate a negative net present value.

 

 

 

Plant Expansion

 

Retail Store Expansion

Present value of net cash flow total:

$

488,100

$

497,230

Amount to be invested:

 

$480,000

 

$  480,000

Net present value:

$

8,100

$

17,230

 

 

 

 

 

 

 

 

 

 

 

Answer:

 

Net Present Value calculation of Plant Expansion

 

           
           
           
           
   

 

 

 

Net Present Value calculation of Retail Store Expansion

 

 

           
           
           
           
   

 

 

 

 

 

2.  Prepare a brief report advising management on the relative merits of each project. The input in the box below will not be graded, but may be reviewed and considered by others.