Finance Capital Investment Decision

5 Capital investments

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:

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.

12 years ago

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