Playtime Products is considering producing toy action figures and sandbox toys.
ID: 2584519 • Letter: P
Question
Playtime 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.
Calculate the sandbox toy project's ARR. If the sandbox toy project had a residual value of $200,000, would the ARR change? Explain and recalculate if necessary. Does this investment pass Playtime's ARR screening rule?
First, enter the formula, then compute the ARR of the sandbox toy project. (Enter amounts in dollars, not millions. Enter your answer as a percent rounded to two decimal places.)
_______________(/)_________________=Accounting rate of return
5 Parts remaining...
S12-5 (similar to) Data Table Playtime Products is consid The two products have diffe (Click the icon to view Calculate the sandbox toy rule? Annual Net Cash Inflows in Year oy action Sandbox toy figure project project First, enter the formula, the 540,000 375,000 310,000 280,000 25,000 1,678,750$ 1,530,000 335,750 S 335,750 335,750 335,750 335,750 4. Total Playtime will consider making capital investments only if the payback period of the project Choose from any drop-do Print Done parts emainingExplanation / Answer
ARR =( Average Accounting Profit / Average Investment) * 100
Cost of sandbox toy project = $1,000,000
Residual Value = 0
So depreciation = 1,000,000 / 5 = $200,000 per year
Average Accounting Income = 530,000 / 5 = 106,000
Average Investment = 1,000,000
So,ARR = (106,000 / 1,000,000) * 100 = 10.6%
If the project has a residual value of 200,000 then depreciation = 1,000,000 - 200,000 = 800,000 / 5 =160,000 per year. So accounting income will increase by 200,000 i.e. 530,000 + 200,000 = 730,000
Average accounting income = 730,000 / 5 = 146,000
Average Investment = 1,000,000
ARR =(146,000 / 1,000,000) * 100 = 14.6%
Thus ARR will increase by 4%.
YEAR ANNUAL NET CASH FLOWS -DEPRICIATION NET INCOME 1 540,000 -200,000 340,000 2 375,000 -200,000 175,000 3 310,000 -200,000 110,000 4 280,000 -200,000 80,000 5 25,000 -200,000 -175,000 TOTAL 1,530,000 1,000,000 530,000