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 $285,000. A rate of 20% 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 $157,000 $131,000 2 128,000 154,000 3 111,000 105,000 4 100,000 74,000 5 31,000 63,000 Total $527,000 $527,000

Explanation / Answer

1a. To compute the cash payback period for each product:

Initial investment in both project = $285,000

1b. To compute the NPV:

20% rate is selected for calculation of NPV.

2. Both the projects have same cash payback period of 2 Years and the same total cash flow but there NPV is different. NPV of project Home & garden is $ 59,544 which is greater than NPV of Music beat which is $ 52,788. The difference is found to be $ 6756. Hence, Home & garden Project is better than Music beat.

If you liked my answer, please provide thumbs up!

Years Home & garden (a) Music beat (b) Discounting factor (c) Discounted home & garden (d = a*c) Discounted music beat (e = b*c) 1 157,000 131,000 0.833 130,781 109,123 2 128,000 154,000 0.694 88,832 106,876 3 111,000 105,000 0.579 64,269 60,795 4 100,000 74,000 0.482 48,200 35,668 5 31,000 63,000 0.402 12,462 25,326 Total 527,000 527,000 344,544 337,788

Related Questions

Navigate

• Browse (All)
• Browse H
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.