Question

Hi, using the attached files, could you please answer this? It is about Elite Apparel Inc. considering two investment projects. The estimated net cash flows from each project are as follows:

Answer 1

1a. The cash payback period for Retail Store Expansion is approximately 1.813 years, and for Plant Expansion, it's approximately 2.177 years. 1b. The Net Present Value for Retail Store Expansion is positive, making it a favorable investment compared to Plant Expansion. Total NPV = 68,329. 2. Because of the timing of the receipt of the net cash flows, the Retail Store Expansion offers a higher Net Present Value.

1a. Cash Payback Period:

The cash payback period is the time it takes for the initial investment to be recovered from the net cash flows.

For Retail Store Expansion:

`\[ Cash\,Payback\,Period = (Initial\,Investment)/(Net\,Cash\,Flow\,Year\,1) = (283,000)/(156,000) \approx 1.813 \, years \]`

For Plant Expansion:

`\[ Cash\,Payback\,Period = (Initial\,Investment)/(Net\,Cash\,Flow\,Year\,1) = (283,000)/(130,000) \approx 2.177 \, years \]`

1b. Net Present Value (NPV):

Using the present value tables provided, calculate the present value of each year's net cash flow, subtract the investment, and sum the values.

`\[ NPV_{\text{Retail Store Expansion}} = 156,000 * 0.893 + 127,000 * 0.797 + 105,000 * 0.712 + 73,000 * 0.567 + 63,000 * 0.507 - 283,000 \]\[ NPV_{\text{Plant Expansion}} = 130,000 * 0.870 + 153,000 * 0.756 + 31,000 * 0.482 - 283,000 \]\[ \text{Total NPV} = NPV_{\text{Retail Store Expansion}} + NPV_{\text{Plant Expansion}} \]`

Total NPV = 68,329

2. Because of the timing of the receipt of the net cash flows, the Retail Store Expansion offers a higher Net Present Value. Due to its favorable timing of cash flows, the Retail Store Expansion yields a higher Net Present Value (NPV) than the Plant Expansion. The NPV considers the present value of future cash flows, and the Retail Store's more immediate and positive returns contribute to its superior financial performance.