Elite Apparel Inc. is considering two investment projects. The estimated net cash flows from each project are as follows:YearPlantExpansionRetail StoreExpansion1$127,000 $106,000 2104,000 125,000 390,000 85,000 481,000 60,000 525,000 51,000 Total$427,000 $427,000 Each project requires an investment of $231,000. A rate of 10% has been selected for the net present value analysis.Present Value of $1 at Compound InterestYear6%10%12%15%20%10.9430.9090.8930.8700.83320.8900.8260.7970.7560.69430.8400.7510.7120.6580.57940.7920.6830.6360.5720.48250.7470.6210.5670.4970.40260.7050.5640.5070.4320.33570.6650.5130.4520.3760.27980.6270.4670.4040.3270.23390.5920.4240.3610.2840.194100.5580.3860.3220.2470.162Required:1a. Compute the cash payback period for each product. Cash Payback PeriodPlant Expansion Retail Store Expansion 1b. Compute the net present value. Use the present value of $1 table above. If required, round to the nearest dollar. Plant ExpansionRetail Store ExpansionPresent value of net cash flow total$fill in the blank 3$fill in the blank 4Less amount to be invested$fill in the blank 5$fill in the blank 6Net present value$fill in the blank 7$fill in the blank 82. Because of the timing of the receipt of the net cash flows, the offers a higher .

PAYBACK PERIOD Payback period is the period in which money invested in capital asset is recovered for example is we acquire the asset for 10000 and annual cash in flow is 1000 then pay back period is 10 years i.e. 10000/1000 Formula for Payback period if Cash flow is equal in each year = Actual cost of asset / Annual cash inflow Formula for Payback period if Cash flow is not equal in each year = Lower Limit Year + (Deficiency /Annual cash flow of upper limit year) We have to calculate cumulative cash flow for each of the project Cumulative Cash Flow = Cash Flow of Current Year + Cumulative Cash Flows of Last year Net Present Value - It is the difference between the present value of cash outflow and present value of cash inflow over the life of the project. For this we may use the present value factor, it can be calculated as = 1/(1+r)^1 +1/(1+r)^2 + 1/(1+r)^3 + 1/(1+r)^n Now as per the question Plan expansion and Retain Store expansion required the same initial investment of 231000. (1a) Calculation of Cash Payback period. Plant Expansion Retail Store Expansion Year Cash Flow Cumulative Cash Flow Cash Flow Cumulative Cash Flow 1 127000 127000 106000 106000 2 104000 231000 125000 231000 3 90000 321000 85000 316000 4 81000 402000 60000 376000 5 25000 427000 51000 427000 Now as per the solution above initial investment of 231000 in both the project is recovered within two year. Hence Cash Payback period is 2 years.(1B) Calculation of Net Present Value if rate is10% Plant Expansion Retail Store Expansion Year Cash Flow PVF at 10% Present Value (Cash Flow x PVF at 10%) Cash Flow PVF at 10% Present Value (Cash Flow x PVF at 10%) 1 127000 0.909 115443 106000 0.909 96354 2 104000 0.826 85904 125000 0.826 103250 3 90000 0.751 67590 85000 0.751 63835 4 81000 0.683 55323 60000 0.683 40980 5 25000 0.621 15525 51000 0.621 31671 Total 339785 336090 Less: Initial Investment 231000 231000 Net Present Value 108785 105090 . (2) Because of the timing of the receipt of the net cash flows, the Plant Expansion Net Present value is higher hence Plant Expansion offers is acceptable.

Answered: Elite Apparel Inc. is considering two…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

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	$127,000		$106,000
2	104,000		125,000
3	90,000		85,000
4	81,000		60,000
5	25,000		51,000
Total	$427,000		$427,000

Each project requires an investment of $231,000. A rate of 10% 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 product.

	Cash Payback Period
Plant Expansion
Retail Store Expansion

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	$fill in the blank 3	$fill in the blank 4
Less amount to be invested	$fill in the blank 5	$fill in the blank 6
Net present value	$fill in the blank 7	$fill in the blank 8

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

offers a higher

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