Response to the following problem:
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
|
$220,000
|
$188,000
|
|
2
|
180,000
|
212,000
|
|
3
|
158,000
|
150,000
|
|
4
|
131,000
|
110,000
|
|
5
|
61,000
|
90,000
|
|
Total
|
$750,000
|
$750,000
|
Each product requires an investment of $400,000. A rate of 10% has been selected for the net present value analysis.
Instructions
1. Compute the following for each product:
a. Cash payback period.
b. The net present value. Use the present value of $1 table.
2. Prepare a brief report advising management on the relative merits of each of the two products.