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1. Cash Payback Period, A method of analysis of proposed capital investments that focuses on the present value of the cash flows expected from the investments.Net Present Value Method, and Analysis

   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	$139,000		$116,000
   2	113,000		136,000
   3	98,000		93,000
   4	89,000		65,000
   5	27,000		56,000
   Total	$466,000		$466,000

   Each project requires an investment of $252,000. 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 project.

   	Cash Payback Period
   Plant Expansion	1 year 2 years 3 years 4 years 5 years
   Retail Store Expansion	1 year 2 years 3 years 4 years 5 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
   offers a higher
   • net present value
   • net cash flow
   .

2. Alternative Capital Investments

   The investment committee of Sentry Insurance Co. is evaluating two projects, office expansion and upgrade to computer servers. The projects have different useful lives, but each requires an investment of $1,054,000. The estimated net cash flows from each project are as follows:

   	Net Cash Flow
   Year	Office Expansion				Server
   1	$265,000				$350,000
   2	265,000				350,000
   3	265,000				350,000
   4	265,000				350,000
   5	265,000
   6	265,000

   The committee has selected a rate of 10% for purposes of net present value analysis. It also estimates that the residual value at the end of each project's useful life is $0, but at the end of the fourth year, the office expansion's residual value would be $331,000.

   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

   Present Value of an Annuity of $1 at Compound Interest
   Year	6%	10%	12%	15%	20%
   1	0.943	0.909	0.893	0.870	0.833
   2	1.833	1.736	1.690	1.626	1.528
   3	2.673	2.487	2.402	2.283	2.106
   4	3.465	3.170	3.037	2.855	2.589
   5	4.212	3.791	3.605	3.352	2.991
   6	4.917	4.355	4.111	3.784	3.326
   7	5.582	4.868	4.564	4.160	3.605
   8	6.210	5.335	4.968	4.487	3.837
   9	6.802	5.759	5.328	4.772	4.031
   10	7.360	6.145	5.650	5.019	4.192

   Required:

   If required, use the minus sign to indicate a negative net present value.

   1. For each project, compute the net present value. Use the The sum of the present values of a series of equal cash flows to be received at fixed intervals.present value of an annuity of $1 table above. Ignore the unequal lives of the projects. If required, round to the nearest dollar.

   	Office Expansion	Server Upgrade
   Present value of annual net cash flows	$	$
   Less amount to be invested	$	$
   Net present value	$	$

   2. For each project, compute the net present value, assuming that the office expansion is adjusted to a four-year life for purposes of analysis. Use the present value of $1 table above.

   	Office Expansion	Server Upgrade
   Present value of net cash flow total	$	$
   Less amount to be invested	$	$
   Net present value	$	$

   3. The net present value of the two projects over equal lives indicates that the

   • office expansion
   • server upgrade
   has a higher net present value and would be a superior investment.

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