LLL 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 InflowsYearToy action figure projectSandbox toy projectYear 1. . . . . . . . . . .$428,750$520,000Year 2. . . . . . . . . . .428,750390,000Year 3. . . . . . . . . . .428,750300,000Year 4. . . . . . . . . . .428,750280,000Year 5. . . . . . . . . . .428,75050,000Total$2,143,750$1,540,000 LLL 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 payback period. If the sandbox toy project had a residual value of $225,000, would the payback period change? Explain and recalculate if necessary. Does this investment pass LLL's payback period screening rule?

The terminology "payback period" indicates the number of years necessary to recoup the initial…

Answered: LLL Products is considering producing…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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LLL 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 figure project	Sandbox toy project
Year 1. . . . . . . . . . .	$428,750	$520,000
Year 2. . . . . . . . . . .	428,750	390,000
Year 3. . . . . . . . . . .	428,750	300,000
Year 4. . . . . . . . . . .	428,750	280,000
Year 5. . . . . . . . . . .	428,750	50,000
Total	$2,143,750	$1,540,000

LLL 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 payback period. If the sandbox toy project had a residual value of $225,000, would the payback period change? Explain and recalculate if necessary. Does this investment pass LLL's payback period screening rule?

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