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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Cash payback period, net present value method, and analysis

 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.

Instructions

 1. Compute the following for each product:

 a. Cash payback period.

 b. The net present value. Use the present value of $1table appearing in this chapter (Exhibit 2).

 2. Prepare a brief report advising management on the relative merits of each of the two products.

1. a.

To determine

Cash payback method:

Cash payback period is the expected time period which is required to recover the cost of investment. It is one of the capital investment method used by the management to evaluate the long-term investment (fixed assets) of the business.

Net present value method:

Net present value method is the method which is used to compare the initial cash outflow of investment with the present value of its cash inflows. In the net present value, the interest rate is desired by the business based on the net income from the investment, and it is also called as the discounted cash flow method.

To determine: The cash payback period for the equipment.

Explanation

The cash payback period for the given data is as follows:

SCP Incorporation
Year Sound cellar Pro Gamer
Net cash flow
($)
Cumulative net cash flows ($) Net cash flow
 ($)
Cumulative net cash flows ($)
1         65,00...

b.

To determine

To calculate: The net present value of the investment of SCP Incorporation.

2.

To determine

To prepare: A brief report for advising management on the relative merits of each project.

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