Home Publications Inc. is considering two new magazine products. The estimated n

Question

Home 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 $191,000. A rate of 12% has been selected for the net present value analysis.

Required:

1a. Compute the cash payback period for each product.

1b. Compute the net present value. Use the present value of $1 table above. If required, round to the nearest dollar.

Year Home & Garden Music Beat 1 $105,000 $88,000 2 86,000 103,000 3 74,000 71,000 4 67,000 49,000 5 21,000 42,000 Total $353,000 $353,000

Explanation / Answer

1a

Cash payback period = Number of years needed to recoup the initial investment in a capital budgeting project.

Cash payback period for Home & Garden

Cash payback period = 2 years

Cash payback period for Music Beat

Cash payback period = 2 years

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1b

Present value of net cash flows total for Home & Garden = (105,000 * 0.893) + (86,000 * 0.797) + (74,000 * 0.712) + (67,000 * 0.636) + (21,000 * 0.567)

= 93,765 + 68,542 + 52,688 + 42,612 + 11,907

= 269,514.

Present value of net cash flows total for Music Beat = (88,000 * 0.893) + (103,000 * 0.797) + (71,000 * 0.712) + (49,000 * 0.636) + (42,000 * 0.567)

= 78,584 + 82,091 + 50,552 + 31,164 + 23,814

= 266,205.

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Year Net Cash Flow Cumulative Net Cash Flows 0 -191,000 -191,000 1 105,000 -86,000 2 86,000 0 3 74,000 74,000 4 67,000 141,000 5 21,000 162,000

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