Home Publications Inc. is considering two new magazine products. The estimated n
ID: 2474197 • Letter: H
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 $281,000. A rate of 20% 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.
2. Because of the timing of the receipt of the net cash flows, the Selecthome & gardenmusic beatItem 9 magazine expansion offers a higher Selectnet present valuenet cash flowItem 10 .
Year Home & Garden Music Beat 1 $155,000 $129,000 2 126,000 152,000 3 109,000 104,000 4 99,000 73,000 5 31,000 62,000 Total $520,000 $520,000Explanation / Answer
1a.
Payback period means the period of time that a project requires to recover the money invested in it. The payback period of a project is expressed in years.
Home Publications Inc.
Product Home and Garden
Year
Cash Inflow
Cumulative Cash in flow
1
155000
155000
2
126000
281000
3
109000
390000
4
99000
489000
5
31000
520000
Cash payback Period = 2 years
Home Publications Inc.
Product Music Beat
Year
Cash Inflow
Cumulative Cash in flow
1
129000
129000
2
152000
281000
3
104000
385000
4
73000
458000
5
62000
520000
Cash payback Period = 2 years
1b.
Home and Garden
Music Beat
Present value of net cash flow total
339,850
333,271
Less: Amount to be Invested
281,000
281,000
Net present Value (NPV)
58,850
52,271
Present value of Net cash flow from Home and Garden
Year
Cash flow
PVF @ 20%
Discounted cash inflow
1
155,000
0.8330
129,115
2
126,000
0.6940
87,444
3
109,000
0.5790
63,111
4
99,000
0.4820
47,718
5
31,000
0.4020
12,462
Total Present value
339,850
Present value of Net cash flow from Music Beat
Year
Cash flow
PVF @ 20%
Discounted cash inflow
1
129,000
0.8330
107,457
2
152,000
0.6940
105,488
3
104,000
0.5790
60,216
4
73,000
0.4820
35,186
5
62,000
0.4020
24,924
Total Present value
333,271
Home Publications Inc.
Product Home and Garden
Year
Cash Inflow
Cumulative Cash in flow
1
155000
155000
2
126000
281000
3
109000
390000
4
99000
489000
5
31000
520000
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