Question

1. 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	$142,000		$119,000
   2	116,000		139,000
   3	100,000		95,000
   4	91,000		67,000
   5	28,000		57,000
   Total	$477,000		$477,000

   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 $258,000. A rate of 12% 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:

   1. If funds are unlimited, only the Canadian Cycling product is acceptable to pursue.
   2. Both products offer the same total net cash flows.
   3. Because of the timing of the receipt of the net cash flows, the Canadian Cycling magazine offers a higher net present value.
   4. Both products offer the same cash payback period.

   a

   Feedback

   1.
   (a) For each project, start with Year 1 and accumulate the net cash flows until the initial investment is reached.
   (b) For each project, multiply the present value factor for each year by that year's net cash flow. Subtract the initial investment from the total present value of the net cash flow.

   2. A report can take many forms and include information regarding the total net cash flows, cash payback period, and net present value.

Check My Work

Answer 1

1a is correct.
1b)				Present Value	Present Value
year	Canadian Cycling	European Hiking	Discount 12%	Canadian Cycling	European Hiking
1	142000	119000	0.893	126806	106267
2	116000	139000	0.797	92452	110783
3	100000	95000	0.712	71200	67640
4	91000	67000	0.636	57876	42612
5	28000	57000	0.567	15876	32319
Total	477000	477000		364210	359621
Less:Investment				258000	258000
Net Present Value				106210	101621
2) The untrue statement regarding
the two products are:
a) If funds are unlimited, only
the Canadian Cycling product
is acceptable to pursue.
(because if funds are unlimited than
both the products can be accepted)