Play Products is considering producing toy action figures and sandbox toys. The products require different specialized machines, each costing $1.4million. Each machine has a five-year life and zero residual value. The two products have different patterns of predicted net cash inflows: Play will consider making capital investments only if the payback period of the project is less than 3.5 years and the ARR exceeds 8%. Annual Net CashAnnual Inflows Year Toy action figure project Sandbox toy project Year 1. . . . . . . . . . . $305,450 $550,000 Year 2. . . . . . . . . . . 305,450 350,000 Year 3. . . . . . . . . . . 305,450 310,000 Year 4. . . . . . . . . . . 305,450 270,000 Year 5. . . . . . . . . . . 305,450 25,000 Total $1,527,250 $1,505,000 Calculate the toy action figure project's payback period. If the toy action figure project had a residual value of $150,000,would the payback period change? Explain and recalculate if necessary. Does this investment pass Plays payback period screening rule?
Play Products is considering producing toy action figures and sandbox toys. The products require different specialized machines, each costing $1.4million. Each machine has a five-year life and zero residual value. The two products have different patterns of predicted net cash inflows: Play will consider making capital investments only if the payback period of the project is less than 3.5 years and the ARR exceeds 8%. Annual Net CashAnnual Inflows Year Toy action figure project Sandbox toy project Year 1. . . . . . . . . . . $305,450 $550,000 Year 2. . . . . . . . . . . 305,450 350,000 Year 3. . . . . . . . . . . 305,450 310,000 Year 4. . . . . . . . . . . 305,450 270,000 Year 5. . . . . . . . . . . 305,450 25,000 Total $1,527,250 $1,505,000 Calculate the toy action figure project's payback period. If the toy action figure project had a residual value of $150,000,would the payback period change? Explain and recalculate if necessary. Does this investment pass Plays payback period screening rule?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Play Products is considering producing toy action figures and sandbox toys. The products require different specialized machines, each costing $1.4million. Each machine has a five-year life and zero residual value. The two products have different patterns of predicted net cash inflows:
Play will consider making capital investments only if the payback period of the project is less than 3.5 years and the ARR exceeds 8%.
|
Annual Net CashAnnual Inflows
|
||
|---|---|---|
|
Year
|
Toy action figure project
|
Sandbox toy project
|
|
Year 1. . . . . . . . . . .
|
$305,450
|
$550,000
|
|
Year 2. . . . . . . . . . .
|
305,450
|
350,000
|
|
Year 3. . . . . . . . . . .
|
305,450
|
310,000
|
|
Year 4. . . . . . . . . . .
|
305,450
|
270,000
|
|
Year 5. . . . . . . . . . .
|
305,450
|
25,000
|
|
Total
|
$1,527,250
|
$1,505,000
|
Calculate the toy action figure project's payback period. If the toy action figure project had a residual value of $150,000,would the payback period change? Explain and recalculate if necessary. Does this investment pass Plays payback period screening rule?
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