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 $264,000. A rate of 15% has been selected for the net present value analysis.

Required:

1a. Compute the cash payback period for each product.

Music Beat

_______?

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 $145,000 $121,000 2 119,000 143,000 3 102,000 98,000 4 93,000 68,000 5 29,000 58,000 Total $488,000 $488,000

Explanation / Answer

PBP Home and Garden Music Beta Time Amount Cumulative Amount Cumulative                                                                                                         -       (264,000.00)     (264,000.00)       (264,000.00)       (264,000.00)                                                                                                    1.00        145,000.00     (119,000.00)         121,000.00       (143,000.00)                                                                                                    2.00        119,000.00                         -           143,000.00                           -                                                                                                      3.00        102,000.00        102,000.00            98,000.00            98,000.00                                                                                                    4.00          93,000.00        195,000.00            68,000.00         166,000.00                                                                                                    5.00          29,000.00        224,000.00            58,000.00         224,000.00 Payback period 2 Years 2 Years Statement showing Cash flows Home and Garden Music beat Particulars Time PVf 15% Amount PV Cash Outflows                         -                       1.00       (264,000.00)       (264,000.00)                 (264,000.00)       (264,000.00) PV of Cash outflows = PVCO       (264,000.00)       (264,000.00) Cash inflows                     1.00                0.8700         145,000.00         126,150.00                    121,000.00         105,270.00 Cash inflows                     2.00                0.7560         119,000.00            89,964.00                    143,000.00         108,108.00 Cash inflows                     3.00                0.6580         102,000.00            67,116.00                      98,000.00            64,484.00 Cash inflows                     4.00                0.5720            93,000.00            53,196.00                      68,000.00            38,896.00 Cash inflows                     5.00                0.4970            29,000.00            14,413.00                      58,000.00            28,826.00 PV of Cash Inflows =PVCI         350,839.00         345,584.00 NPV= PVCI - PVCO            86,839.00            81,584.00 Because of the timing of the receipt of the net cash flows, the Home and Garden magazine expansion offers a higher NPV

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