Question

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

Year	Sound Cellar	Pro Gamer
1	65,000	70,000
2	60,000	55,000
3	25,000	35,000
4	25,000	30,000
5	45,000	30,000
Total	220,000	220,000

Each product requires an investment of $125,000. A rate of 10% has been selected for the net present value analysis.

1. Calculate the payback period for the two products.
2. Calculate the net present value for the two products.

Answer 1

A]	SOUND CELLAR:
	Year	Cash Flow	Cumulative Cash Flow
	0	$ -1,25,000	$ -1,25,000
	1	$             65,000	$ -60,000
	2	$             60,000	$                      -
	3	$             25,000	$             25,000
	4	$             25,000	$             50,000
	5	$             45,000	$             95,000
	Payback = 2 years
	PRO GAMER:
	Year	Cash Flow	Cumulative Cash Flow
	0	$ -1,25,000	$ -1,25,000
	1	$             70,000	$ -55,000
	2	$             55,000	$                      -
	3	$             35,000	$             35,000
	4	$             30,000	$             65,000
	5	$             30,000	$             95,000
	Payback = 2 years
B]	Year	Cash Flow	PVIF at 10%	PV at 10%
	0	$ -1,25,000	1.00000	$ -1,25,000
	1	$             65,000	0.90909	$            59,091
	2	$             60,000	0.82645	$            49,587
	3	$             25,000	0.75131	$            18,783
	4	$             25,000	0.68301	$            17,075
	5	$             45,000	0.62092	$            27,941
	NPV			$            47,477
	PRO GAMER:
	Year	Cash Flow	PVIF at 10%	PV at 10%
	0	$ -1,25,000	1.00000	$ -1,25,000
	1	$             70,000	0.90909	$            63,636
	2	$             55,000	0.82645	$            45,455
	3	$             35,000	0.75131	$            26,296
	4	$             30,000	0.68301	$            20,490
	5	$             30,000	0.62092	$            18,628
	NPV			$            49,505