Question
Playtime Products is considering producing toy action figures and sandbox toys. The products require different specialized machines, each costing $1 million. Each machine has a
Playtime Products is considering producing toy action figures and sandbox toys. The products require different specialized machines, each costing $1 million. Each machine has a five-year life and zero residual value. The two products have different patterns of predicted net cash inflows.
| Annual Net Cash Inflows | |
Year | Toy action | Sandbox toy |
| figure project | project |
1. . . . . . . . . . . . . . . | $343,000 | $550,000 |
2. . . . . . . . . . . . . . . | 343,000 | 360,000 |
3. . . . . . . . . . . . . . . | 343,000 | 310,000 |
4. . . . . . . . . . . . . . . | 343,000 | 230,000 |
5. . . . . . . . . . . . . . . | 343,000 | 50,000 |
Total | $1,715,000 | $1,500,000 |
Playtime will consider making capital investments only if the payback period of the project is less than 3.5 years and the ARR exceeds 8%.
Calculate the sandbox toy project's ARR. If the sandbox toy project had a residual value of $225,000, would the ARR change? Explain and recalculate if necessary. Does this investment pass Playtime's ARR screening rule?
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