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#1 Cash Payback Period, Net Present Value Method, and Analysis for a Service Company

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	$	$
Amount to be invested	$	$
Net present value	$	$

2. Because of the timing of the receipt of the net cash flows, the magazine expansion offers a higher .

#2 Net Present Value Method, Internal Rate of Return Method, and Analysis for a Service Company

The management of Style Networks Inc. is considering two TV show projects. The estimated net cash flows from each project are as follows:

Year		After Hours		Sun Fun
1		$320,000		$290,000
2		320,000		290,000
3		320,000		290,000
4		320,000		290,000

After Hours requires an investment of $913,600, while Sun Fun requires an investment of $880,730. No residual value is expected from either project.

Present Value of an Annuity of $1 at Compound Interest
Year	6%	10%	12%	15%	20%
1	0.943	0.909	0.893	0.870	0.833
2	1.833	1.736	1.690	1.626	1.528
3	2.673	2.487	2.402	2.283	2.106
4	3.465	3.170	3.037	2.855	2.589
5	4.212	3.791	3.605	3.352	2.991
6	4.917	4.355	4.111	3.784	3.326
7	5.582	4.868	4.564	4.160	3.605
8	6.210	5.335	4.968	4.487	3.837
9	6.802	5.759	5.328	4.772	4.031
10	7.360	6.145	5.650	5.019	4.192

Required:

1a. Compute the net present value for each project. Use a rate of 10% and the present value of an annuity of $1 in the above table. If required, round to the nearest dollar.

	After Hours	Sun Fun
Present value of annual net cash flows	$	$
Amount to be invested	$	$
Net present value	$	$

1b. Compute a present value index for each project. If required, round your answers to two decimal places.

	Present Value Index
After Hours
Sun Fun

2. Determine the internal rate of return for each project by (a) computing a present value factor for an annuity of $1 and (b) using the present value of an annuity of $1 table above. If required, round your present value factor answers to three decimal places and internal rate of return to the nearest percent.

	After Hours	Sun Fun
Present value factor for an annuity of $1
Internal rate of return	%	%

3. The net present value, present value index, and internal rate of return all indicate that the TV show is a better financial opportunity compared to the TV show, although both investments meet the minimum return criterion of 10%.

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