Question
Toyland Products is considering producing toy action figures and sandbox toys. The products require different specialized machines, each $1 million. Each machine has a five-year
Toyland Products is considering producing toy action figures and sandbox toys. The products require different specialized machines, each $1 million. Each machine has a five-year 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. . . . . . . . . . . . . . . | $317,750 | $510,000 |
2. . . . . . . . . . . . . . . | 317,750 | 360,000 |
3. . . . . . . . . . . . . . . | 317,750 | 300,000 |
4. . . . . . . . . . . . . . . | 317,750 | 280,000 |
5. . . . . . . . . . . . . . . | 317,750 | 30,000 |
Total | $1,588,750 | $1,480,000 |
Toyland 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 toy action figure project's ARR. If the toy action figure project had a residual value of $125,000, would the ARR change? Explain and recalculate if necessary. Does this investment pass Toyland's ARR screening rule?
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