Question

Cash payback period, net present value method, and analysis for a service company PR 25-2B Obj. 2, 3 Social Circle Publications Inc. is considering two new magazine products. The estimated net cash flows from each product are as follows: EXCEL TEMPLATE Pro Gamer Sound Cellar Year 70,000 55,000 35,000 30,000 30,000 65,000 60,000 25,000 25,000 45,000 Total $220.000 $22000 ct requires an investment of $125,000. A rate of 10% has been selected for the Each produ net present value analysis. Instructions 1. Compute the following for each product A. Cash payback period. e net present value. Use the present value of $I table appearing in this chapter (Exhibit 2). B. Th

Answer 1

Anwer 1-A
Calculation of Cash payback period
Year	Sound Cellar		Pro Gamer
	Net Cash flow	Cumulative net cash flows	Net Cash flow	Cumulative net cash flows
0	-$125,000.00	-$125,000.00	-$125,000.00	-$125,000.00
1	$65,000.00	-$60,000.00	$70,000.00	-$55,000.00
2	$60,000.00	$0.00	$55,000.00	$0.00
3	$25,000.00	$25,000.00	$35,000.00	$35,000.00
4	$25,000.00	$50,000.00	$30,000.00	$65,000.00
5	$45,000.00	$95,000.00	$30,000.00	$95,000.00
Cash payback period for Sound Cellar = 2 years
Cash payback period for Pro Gamer = 2 years
Either magazine is recommended , based on the cash payaback period.
Anwer 1-B
Calculation of net present value
Year	Discount Factor @ 10%	Net Cash flow		Present Value of Net Cash flow
		Sound Cellar	Pro Gamer	Sound Cellar	Pro Gamer
1	0.909090909	$65,000.00	$70,000.00	$59,090.91	$63,636.36
2	0.826446281	$60,000.00	$55,000.00	$49,586.78	$45,454.55
3	0.751314801	$25,000.00	$35,000.00	$18,782.87	$26,296.02
4	0.683013455	$25,000.00	$30,000.00	$17,075.34	$20,490.40
5	0.620921323	$45,000.00	$30,000.00	$27,941.46	$18,627.64
Total				$172,477.35	$174,504.97
Amount to be Invested				$125,000.00	$125,000.00
Net Present Value				$47,477.35	$49,504.97
Pro Gamer magazine is recommended, based on its higher net present value.