Cash Payback Period, Net Present Value Method, and Analysis

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Question: Cash Payback Period, Net Present Value Method, and Analysis Home Publications Inc. is considering…
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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 $136,000 $114,000
2 111,000 133,000
3 96,000 91,000
4 87,000 64,000
5 27,000 55,000
Total $457,000 $457,000

Each product requires an investment of $247,000. A rate of 15%
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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