Home Publications Inc. is considering two new magazine products. The estimated n
ID: 2586840 • Letter: H
Question
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 $280,000. 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
home & garden
or
music beat
magazine expansion offers a higher
net cash flow
or
net present valuenet cash flow.
Year Home & Garden Music Beat 1 $154,000 $129,000 2 126,000 151,000 3 109,000 104,000 4 98,000 73,000 5 31,000 61,000 Total $518,000 $518,000Explanation / Answer
1. Calculation of Cash Payback Period for each Product:
PRODUCT: HOME & GARDEN
YEAR
CASHFLOW
CUMULATIVE CASHFLOW
0
($280,000)
($280,000)
1
$154,000
($126,000)
2
$126,000
0
3
$109,000
$109,000
4
$98,000
$207,000
5
$31,000
$238,000
Cash Payback Period is 2 Years.
PRODUCT: MUSIC BEAT
YEAR
CASHFLOW
CUMULATIVE CASHFLOW
0
($280,000)
($280,000)
1
$129,000
($151,000)
2
$151,000
0
3
$104,000
$104,000
4
$73,000
$177,000
5
$61,000
$238,000
Cash Payback Period is 2 Years.
CALCULATION OF NET PRESENT VALUE:
PRESENT VALUE OF NET CASHFLOWS: HOME & GARDEN
YEAR
CASHFLOW
PVF@15%
DISCOUNTED CASHFLOW
1
$154,000
0.870
$133,980
2
$126,000
0.756
$95,256
3
$109,000
0.658
$71,722
4
$98,000
0.572
$56,056
5
$31,000
0.497
$15,407
TOTAL
$372,421
PRESENT VALUE OF NET CASHFLOWS: MUSICBEAT
YEAR
CASHFLOW
PVF@15%
DISCOUNTED CASHFLOW
1
$129,000
0.870
$112,230
2
$151,000
0.756
$114,156
3
$104,000
0.658
$68,432
4
$73,000
0.572
$41,756
5
$61,000
0.497
$30,317
TOTAL
$366,891
NET PRESENT VALUE:
PARTICULARS
HOME & GARDEN
MUSIC BEAT
Present Value of net cash flow total
$372,421
$366,891
Less Amount to be invested
($280,000)
($280,000)
Net Present Value
$92,421
$86,891
2. Statement is TRUE, in case of internal rate of return how speed cash flows are coming we see but in case of net present value we see timing of cash flows.
YEAR
CASHFLOW
CUMULATIVE CASHFLOW
0
($280,000)
($280,000)
1
$154,000
($126,000)
2
$126,000
0
3
$109,000
$109,000
4
$98,000
$207,000
5
$31,000
$238,000
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