Toyland Products is considering producing toy action figures and sandbox toys. T
ID: 2584510 • Letter: T
Question
Toyland Products is considering producing toy action figures and sandbox toys. The products require different specialized machines, each costing $1 MILLION
million. Each machine has a five-year life and zero residual value. The two products have different patterns of predicted net cash inflows:
Data Table d sa flow as a fiv figure project project ox t necess 540,000 390,000 310,000 275,000 20,000 1,857,500 1,535,000 371,500$ 371,500 371,500 371,500 371,500 2 4 r a Total Toyland will consider making capital investments only if the payback period of the project is less than 3.5 years and the ARR exceeds 8% Print Done werExplanation / Answer
A. Calculation of Payback Period
1. For Toy Action Figure
Total Investment = $ 1,000,000
First Two Yera Net Cash Flow= $ 371500 + $ 371500
= $ 743,000
Balance Investment to be Recoverd from Third Year Cash Flow= Total Investment - FirstTwo Year Net Cash Flow
= $ 1,000,000 - $ 743,000
= $ 257,000
Third Year Net Cash Flow = $ 371,500
Payback period = 2 Years + (12MOnths* $ 257000) / $ 371,500
= 2 Years + 8.30 Months
= 2Years 8.30 Months
2. For Sandbox Toy Project
Total Investment = $ 1,000,000
First Two Yera Net Cash Flow= $ 540000 + $ 390000
= $ 930,000
Balance Investment to be Recoverd from Third Year Cash Flow= Total Investment - FirstTwo Year Net Cash Flow
= $ 1,000,000 - $ 930,000
= $ 70,000
Third Year Net Cash Flow = $ 310,500
Payback period = 2 Years + (12Months* $ 70000) / $ 310,500
= 2 Years + 2.71 Months
= 2Years 2.71 Months
B. ARR of the Projects
1. For Toy Action Figure
Total Cash Flows (Given) = $1,857,000
Total Investment (Given) = $ 1,000,000
Net Income= Total Cashflows - Total Investment
= $ 1,857,000 - $ 1,000,000
, = $ 857,000
ARR Year basis = ($ 857,000 / $ 1,000,000)*100 / 5Years
= 17.14%
2. For Sandbox Toy
Total Cash Flows (Given) = $1,535,000
Total Investment (Given) = $ 1,000,000
Net Income= Total Cashflows - Total Investment
= $ 1,535,000 - $ 1,000,000
, = $ 535,000
ARR Year basis = ($ 535,000 / $ 1,000,000)*100 / 5Years
= 10.70%
So, Company Internal Policy for both the Project is Fullfill but as per the calculation shown above company should invest in Toy Action Figuer Because It will within the payback period and earn maximum Return to the company,
And
If the Sandbox Toy has $ 200,000 Residule value then also the income will not exceed the Toy figure so answer will not change in this condition also.
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