Cash Payback Period, Net Present Value Method, and Analysis

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 $137,000 $115,000 2 112,000 134,000 3 97,000 92,000 4 88,000 65,000 5 27,000 55,000 Total $461,000 $461,000

Each product requires an investment of $249,000. A rate of 20% has been selected for the net present value analysis.

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

Required:

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

Cash Payback Period Home & Garden 2 years Music Beat 2 years

1b. Compute the net present value. Use the present value of $1 table above. If required, round to the nearest dollar.

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

2. Because of the timing of the receipt of the net cash flows, the home & garden magazine expansion offers a higher net present value .

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