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 $194,000. 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 $107,000 $89,000 2 87,000 105,000 3 75,000 72,000 4 68,000 50,000 5 22,000 43,000 Total $359,000 $359,000

Explanation / Answer

1a Cash Payback Period Home & Garden 2 years Music Beat 2 years 1b Home & Garden Music Beat PV factor Net cash flows Present value Net cash flows Present value Year 1 0.893 107000 95551 89000 79477 Year 2 0.797 87000 69339 105000 83685 Year 3 0.712 75000 53400 72000 51264 Year 4 0.636 68000 43248 50000 31800 Year 5 0.567 220000 124740 43000 24381 386278 270607 Home & Garden Music Beat Present value of net cash flow total 386278 270607 Less amount to be invested 194000 194000 Net present value 192278 76607 2 Because of the timing of the receipt of the net cash flows, the Home & Garden magazine offers a higher net present value

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