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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Chapter19: Capital Investment
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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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