Home Publications Inc. is considering two new magazine products. The estimated n

Question

Home Publications Inc. is considering two new magazine products. The estimated net cash flows from each product are as follows: Year Home & Garden Music Beat $118,000 $141,000 115,000 100,000 138,000 95,000 66,000 90,000 28,000 57,000 Total $474,000 $474,000 Each product requires an investment of $256,000. A rate of 12% has been selected for the net present value analysis. Present Value of $1 at Compound Interest Year 6% 15% 20% ? 0.943 0.870 0.833 10% 0.909 0.826 0.751 12% 0.893 0.797 0.712 ? 0.890 0.694 ? 0.840 0.579 0.792 0.482 o 0.747 0.683 0.621 0.564 0.636 0.567 0.507 0.402 0.335 o 0.756 0.658 0.572 0.497 0.432 0.376 0.327 0.284 0.247 0.705 0.665 0.513 0.452 0.279 o 0.627 0.467 0.404 0.233 o 0.592 .558 0.424 0.386 0.361 0.322 0.194 0.162 100

Explanation / Answer

1-a) Home Publications Home & Garden year amount 1 141,000 141,000 2 115,000 256,000 3 0 4 256000 2 years Music Beat year amount 1 118,000 118,000 2 138,000 256,000 3 0 4 256000 2 years Cash payback period Home & Garden 2 years Music Beat 2 years Home & Music Garden Beat 1-b) present value of net cash flow total 361884 357295 less amount to be invested 256000 256000 net present value 105884 101295 year home & Garden Factor PV of $1 1 141,000 0.893 125913 2 115,000 0.797 91655 3 100,000 0.712 71200 4 90,000 0.636 57240 5 28,000 0.567 15876 361884 year home & Garden Factor PV of $1 1 118,000 0.893 105374 2 138,000 0.797 109986 3 95,000 0.712 67640 4 66,000 0.636 41976 5 57,000 0.567 32319 357295 2) because of the timing of the receipt of the net cash flows ,the home & garden magazine offers higher net present value

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