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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. Instructions 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.

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Accounting

27th Edition
WARREN + 5 others
Publisher: Cengage Learning,
ISBN: 9781337272094
BuyFind

Accounting

27th Edition
WARREN + 5 others
Publisher: Cengage Learning,
ISBN: 9781337272094

Solutions

Chapter
Section
Chapter 26, Problem 26.2APR
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.

Instructions

 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.

Expert Solution

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.

Explanation of Solution

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

Expert Solution

b.

To determine

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

Expert Solution

2.

To determine

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

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Chapter 26 Solutions

Accounting
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