Toy World Products is considering producing toy action figures and sandbox toys. The products require different specialized machines, each costing $1.1 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. . . . . . . . . . . $327,000 $500,000 Year 2. . . . . . . . . . . 327,000 350,000 Year 3. . . . . . . . . . . 327,000 300,000 Year 4. . . . . . . . . . . 327,000 275,000 Year 5. . . . . . . . . . . 327,000 40,000 Total $1,635,000 $1,465,000 Toy World 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 $200,000, would the ARR change? Explain and recalculate if necessary. Does this investment pass Toy World's ARR screening rule?
Toy World Products is considering producing toy action figures and sandbox toys. The products require different specialized machines, each costing $1.1 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. . . . . . . . . . . $327,000 $500,000 Year 2. . . . . . . . . . . 327,000 350,000 Year 3. . . . . . . . . . . 327,000 300,000 Year 4. . . . . . . . . . . 327,000 275,000 Year 5. . . . . . . . . . . 327,000 40,000 Total $1,635,000 $1,465,000 Toy World 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 $200,000, would the ARR change? Explain and recalculate if necessary. Does this investment pass Toy World's ARR 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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Toy World Products is considering producing toy action figures and sandbox toys. The products require different specialized machines, each costing $1.1 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. . . . . . . . . . .
|
$327,000
|
$500,000
|
|
Year 2. . . . . . . . . . .
|
327,000
|
350,000
|
|
Year 3. . . . . . . . . . .
|
327,000
|
300,000
|
|
Year 4. . . . . . . . . . .
|
327,000
|
275,000
|
|
Year 5. . . . . . . . . . .
|
327,000
|
40,000
|
|
Total
|
$1,635,000
|
$1,465,000
|
Toy World 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
$200,000, would the ARR change? Explain and recalculate if necessary. Does this investment pass
Toy World's ARR screening rule?
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