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?
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?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
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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