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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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