eBook

Question Content Area

Cash Payback Period, Net Present Value Method, and Analysis

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

Year	Primitive Camping		Lakeside Fishing
1	$138,000		$115,000
2	112,000		135,000
3	97,000		93,000
4	88,000		65,000
5	28,000		55,000
Total	$463,000		$463,000

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 $250,000. A rate of 10% has been selected for the net present value analysis.

Required:

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

	Cash Payback Period
Primitive Camping	1 year2 years3 years4 years5 years
Lakeside Fishing	1 year2 years3 years4 years5 years

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

	Primitive Camping		Lakeside Fishing
Present value of net cash flow total	$fill in the blank 3		$fill in the blank 4
Amount to be invested	fill in the blank 5		fill in the blank 6
Net present value	$fill in the blank 7		$fill in the blank 8

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

1. If funds are unlimited, only the Primitive Camping product is acceptable to pursue.
2. Both products offer the same total net cash flows.
3. Because of the timing of the receipt of the net cash flows, the Primitive Camping magazine offers a higher net present value.
4. Both products offer the same cash payback period.