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:

Each product requires an investment of $194,000. A rate of 6% 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

Cash payback period Home & Garder year 1 107,000 year 2 87,000 total 194,000 Music Beat year 1 89,000 year 2 105,000 total 194,000 1) Cash payback period Home & Garden 2 years Music Beat 2 years 2) home & Garden year cash factor PV 1 107,000 0.943 100901 2 87,000 0.89 77430 3 75,000 0.84 63000 4 68,000 0.792 53856 5 22,000 0.747 16434 total PV 311621 Music Beat year cash factor PV 1 89,000 0.943 83927 2 105,000 0.89 93450 3 72,000 0.84 60480 4 50,000 0.792 39600 5 43,000 0.747 32121 total PV 309578 1b) Home gar music present value of net cash flow total 311621 309578 less amount to be invested -194,000 -194,000 net present value 117621 115578 2) Home & gardern

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