Provide calculations and formulas for below. Social Circle Publications Inc. is

Question

Provide calculations and formulas for below.

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.

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 of the two products.

Explanation / Answer

2. Report to management:

To ,

.......

XYZ Company.

Dear Sir,

On the basis of the attached calculations made it can be concluded that its better to consider "pro gamer" for further consideration.

Both Sound cellar and pro gamer have equal pay back period. But NPV is more in case of pro gamer.

Further, Pro gamer's cash flow is more in the recent years than sound cellar whcih will ensure that we dont have liquidity problems.

So, pro gamer should be chosen.

Calculation of payback period Year Sound Cellar Pro gamer cash Flow ($) Cumulative Cash flow($) cash Flow ($) Cumulative Cash flow($) 0 -125000 -125000 -125000 -125000 1 65000 -60000 70000 -55000 2 60000 0 55000 0 3 25000 25000 35000 35000 4 25000 50000 30000 65000 5 45000 95000 30000 95000 Payback period = A*B/C A= last period with negative cumulative cash flow B=Cumulative cash flow at the period A C=cashflow next year to A Sound cellar 1*0/60000 1 year Progamer 1/0*55000 1 year

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