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 $233,000. 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.

2. Because of the timing of the receipt of the net cash flows, the_________ magazine expansion offers a higher _______________.

Year Home & Garden Music Beat 1 $128,000 $107,000 2 105,000 126,000 3 91,000 86,000 4 82,000 60,000 5 25,000 52,000 Total $431,000 $431,000

Explanation / Answer

1a) Cash Payback period

1b) Net present value

2) Because of timing of the receipt of the net cash flows, the home & Garden magazine expansion offers a higher Net present value.

Particulars Cash Back Period Home & Garden 2 Years Music Beat 2 Years a) Home & Garden Payback period Year Investment amount Net cash inflows Balance investment 1 233000 128000 105000 2 105000 105000 0 3 0 91000 -91000 4 -91000 82000 -173000 5 -173000 25000 -198000 b) Music Beat Payback period Year Investment amount Net cash inflows Balance investment 1 233000 107000 126000 2 126000 126000 0 3 0 86000 -86000 4 -86000 60000 -146000 5 -146000 52000 -198000

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