27th Edition
WARREN + 5 others
ISBN: 9781337272094




27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Cash payback period, 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 $ 450,000 $ 500,000
2 450,000 400,000
3 340,000 350,000
4 280,000 250,000
5 180,000 200,000
Total $1,700,000 $1,700,000

 Each project requires an investment of $900,000. A rate of 15% has been selected for the net present value analysis.


 1. Compute the following for each product:

 a. Cash payback period.

 b. The net present value. Use the present value of $1 table appearing in this chapter (Exhibit 2).

 2. Prepare a brief report advising management on the relative merits of each project.

1. a.

To determine

Cash payback method:

Cash payback period is the expected time period which is required to recover the cost of investment. It is one of the capital investment method used by the management to evaluate the long-term investment (fixed assets) of the business.

Net present value method:

Net present value method is the method which is used to compare the initial cash outflow of investment with the present value of its cash inflows. In the net present value, the interest rate is desired by the business based on the net income from the investment, and it is also called as the discounted cash flow method.

To determine: The cash payback period for the equipment.


The cash payback period for the given data is as follows:


To determine

To calculate: The net present value of the investment of Company BE.


To determine

To prepare: A brief report for advising management on the relative merits of each project.

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