Question

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

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.

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
Sound Cellar
Pro Gamer

1b. Compute the net present value. Use the present value of $1 table above. If required, round to the nearest dollar.

	Sound Cellar	Pro Gamer
Present value of net cash flow total	$	$
Less amount to be invested	$	$
Net present value	$	$

2.

First United Bank Inc. is evaluating three capital investment projects by using the net present value method. Relevant data related to the projects are summarized as follows:

	Branch Office Expansion		Computer System Upgrade		ATM Kiosk Expansion
Amount to be invested . . . . . . . . . . . . . . . . . . . . . . .	$420,000		$350,000		$520,000
Annual net cash flows:
Year 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	200,000	190,000	275,000
Year 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	160,000	180,000	250,000
Year 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	160,000	170,000	250,000

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

Required:

2a. Assuming that the desired rate of return is 15%, prepare a net present value analysis for each project. Use the present value of $1 table above. If required, use the minus sign to indicate a negative net present value. If required, round to the nearest dollar.

	Branch Office Expansion	Computer System Upgrade	ATM Kiosk Expansion
Present value of net cash flow total:	$	$	$
Less amount to be invested:	$	$	$
Net present value:	$	$	$

2b. Determine a present value index for each project. If required, round your answers to two decimal places.

	Present Value Index
Branch Office Expansion
Computer System Upgrade
ATM Kiosk Expansion

Answer 1