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 $129,000 $108,000 2 105,000 126,000 3 91,000 87,000 4 82,000 61,000 5 26,000 51,000 Total $433,000 $433,000 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 $234,000. 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 (1,2,3,4 or 5 years) European Hiking (1,2,3,4 or 5 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: ___ a. If funds are unlimited, only the Canadian Cycling product is acceptable to pursue. b. Both products offer the same total net cash flows. c. Because of the timing of the receipt of the net cash flows, the Canadian Cycling magazine offers a higher net present value. d. Both products offer the same cash payback period.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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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	$129,000	$108,000
2	105,000	126,000
3	91,000	87,000
4	82,000	61,000
5	26,000	51,000
Total	$433,000	$433,000

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 $234,000. 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	(1,2,3,4 or 5 years)
European Hiking	(1,2,3,4 or 5 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: _______

a. If funds are unlimited, only the Canadian Cycling product is acceptable to pursue.

b. Both products offer the same total net cash flows.

c. Because of the timing of the receipt of the net cash flows, the Canadian Cycling magazine offers a higher net present value.

d. Both products offer the same cash payback period.

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