Northwest Records is considering the purchase of Seattle Sound, Inc., a small company that promotes and manages

Question:

Northwest Records is considering the purchase of Seattle Sound, Inc., a small company that promotes and manages â€œgrungeâ€ bands. The terms of the agreement require that Northwest pay the current owners of Seattle Sound $530,000 to purchase the company. Northwest executives estimate that the investment will generate annual net cash flows of $200,000. They do not feel, however, that demand for grunge music will extend beyond four years. Therefore, they plan to liquidate the entire investment in Seattle Sound at its projected book value of $50,000 at the end of the fourth year. Due to the high risk associated with this venture, Northwest requires a minimum rate of return of 20 percent.

a. Compute the payback period for Northwestâ€™s proposed investment in Seattle Sound.

b. Compute the net present value of the Seattle Sound proposal, using the tables in Exhibits 26â€“3 and 26â€“4.

c. What nonfinancial factors would you recommend that Northwest executives take into consideration regarding this proposal?

In Exhibits 26–3

In Exhibits 26–4

Net Present Value
What is NPV? The net present value is an important tool for capital budgeting decision to assess that an investment in a project is worthwhile or not? The net present value of a project is calculated before taking up the investment decision at... Payback Period
Payback period method is a traditional method/ approach of capital budgeting. It is the simple and widely used quantitative method of Investment evaluation. Payback period is typically used to evaluate projects or investments before undergoing them,...