Social Circle Publications Inc. is considering two new magazine products. The es

Question

Social Circle Publications Inc. is considering two new magazine products. The estimated net cash flows from each product are as follows: Each product requires an investment of $125,000. 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 product. Cash Payback Period Sound Cellar Pro Gamer 1b. Compute the net present value. Use the present value of $1 table above. If required, round to the nearest dollar. Sound Cellar Pro Gamer 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 magazine expansion offers a higher .

Explanation / Answer

(1) Cash payback period

Sound cellar = 2years ($65,000 + $60,000 = $125,000)

For pro          = 2years ($70,000 +$55,000= $125,000)

Net present value PRo

Social

Year Inflows Discount factor Present value 1 70,000 .909 $63,630 2 55,000 .826 $45,430 3 35,000. .751 $26,285 4 30,000 .683 $20,490 5 30,000 .621 $18,630 total $174,465 less invested amount $125,000 Net present value $49,465

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