At Home Publications Inc. is considering two new magazine products. The estimate

Question

At 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 $288,000. A rate of 10% has been elected for the net present value analysis Compute the cash payback period for each project. Compute the net present value. Use the present value of $1 table above. If required, use the minus sign to indicate a relative net present value. All of the following are true regarding live two products except:

Explanation / Answer

1a.

Initial investment in both project = $288000

For both the project calculate sum of cash flows till Year 2

Home & garden = $288000

Music beat = $288000

Therefore cash payback period for both project is 2 years

1b.

10% rate is selected for calculation of NPV

Both project has same cash payback period and same total cash flow but there NPV is different. NPV of project Home & garden is more than NPV of Music beat by $4420 thus Home & garden project is better than Music beat

Years Home & garden Music beat Discounting factor Discounted home & garden Discounted music beat 1 158000 132000 0.909 143622 119988 2 130000 156000 0.826 107380 128856 3 112000 107000 0.751 84112 80357 4 101000 75000 0.683 68983 51225 5 32000 63000 0.621 19872 39123 Total 533000 533000 423969 419549

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