Cash Payback Period, Net Present Value Method, and Analysis

At Home Publications Inc. is considering two new magazine products. The estimated net cash flows from each product are as follows:

Year	Home & Garden		Music Beat
1	$152,000		$127,000
2	124,000		149,000
3	107,000		102,000
4	97,000		72,000
5	31,000		61,000
Total	$511,000		$511,000

Present Value of $1 at Compound Interest
Year	6%	10%	12%	15%	20%
1	0.943	0.909	0.893	0.870	0.833
2	0.890	0.826	0.797	0.756	0.694
3	0.840	0.751	0.712	0.658	0.579
4	0.792	0.683	0.636	0.572	0.482
5	0.747	0.621	0.567	0.497	0.402
6	0.705	0.564	0.507	0.432	0.335
7	0.665	0.513	0.452	0.376	0.279
8	0.627	0.467	0.404	0.327	0.233
9	0.592	0.424	0.361	0.284	0.194
10	0.558	0.386	0.322	0.247	0.162

Each product requires an investment of $276,000. A rate of 20% has been selected for the net present value analysis.

Instructions:

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

	Cash Payback Period
Home & Garden	_________________ years
Music Beat	_________________ years

1b. Compute the net present value. Use the present value of $1 table above. If required, use the minus sign to indicate a negative net present value.

	Home & Garden		Music Beat
Present value of net cash flow total	$ _________________		$ _________________
Amount to be invested	_________________		_________________
Net present value	$ _________________		$ _________________

2. All of the following are true regarding the two products except:

If funds are unlimited, only the Home & Garden product is acceptable to pursue.

Both products offer the same total net cash flows.

Because of the timing of the receipt of the net cash flows, the Home & Garden magazine offers a higher net present value.

Both products offer the same cash payback period.

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