Question

Cash Payback Period, Net Present Value Method, and Analysis

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

Year	Canadian Cycling		European Hiking
1	$155,000		$129,000
2	126,000		152,000
3	109,000		104,000
4	99,000		73,000
5	31,000		62,000
Total	$520,000		$520,000

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 $281,000. A rate of 15% has been selected for the net present value analysis.

Required:

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

	Cash Payback Period
Canadian Cycling	2 years
European Hiking	2 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.

	Canadian Cycling		European Hiking
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 Canadian Cycling 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 Canadian Cycling magazine offers a higher net present value.

Both products offer the same cash payback period.

a

Answer 1

Please hit LIKE button if this helped. For any further explanation, please put your query in comment, will get back to you.
Year	Canadian Cycling			European Hiking
	Amount	PVF15%	PV		PVF15%	PV
1	$     155,000	0.870	$     134,850	$     129,000	0.870	$     112,230
2	$     126,000	0.756	$      95,256	$     152,000	0.756	$     114,912
3	$     109,000	0.658	$      71,722	$     104,000	0.658	$      68,432
4	$      99,000	0.572	$      56,628	$      73,000	0.572	$      41,756
5	$      31,000	0.497	$      15,407	$      62,000	0.497	$      30,814
Present Value of Net Cash Flow			$       373,863			$       368,144
Investment			$       281,000			$       281,000
Net Present Value			$         92,863			$         87,144
2. All of the following are true regarding the two products except:
If funds are unlimited, only the Canadian Cycling product is acceptable to pursue.