Cash Payback Period, Net Present Value Method, and Analysis Home Publications In

Question

Cash Payback Period, Net Present Value Method, and Analysis

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 $181,000. A rate of 15% 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 magazine expansion offers a higher .

PLEASE SHOW STEPS ON HOW TO GET ANSWER FOR EACH ANSWER**

Year Home & Garden Music Beat 1 $100,000 $83,000 2 81,000 98,000 3 70,000 67,000 4 64,000 47,000 5 20,000 40,000 Total $335,000 $335,000

Explanation / Answer

(1-a)

Payback period (PBP) is the time by when a project's future cash flows recover its initial investment & cumulative cash flows equal zero.

For Home & Garden, PBP = 2 years

For Music Beat, PBP = 2 years

(1-b)

Note: First question is answered.

HOME & GARDEN Year Cash Flow Cumulative cash flow 0 -1,81,000 -1,81,000 1 1,00,000 -81,000 2 81,000 0 3 70,000 70,000 4 64,000 1,34,000 5 20,000 1,54,000 MUSIC BEATS Year Cash Flow Cumulative cash flow 0 -1,81,000 -1,81,000 1 83,000 -98,000 2 98,000 0 3 67,000 67,000 4 47,000 1,14,000 5 40,000 1,54,000

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