Question

	Annual Net Cash Inflows
Year	Toy action	Sandbox toy
	figure project	project
1. . . . . . . . . . . . .	$343,000	$550,000
2. . . . . . . . . . . . .	343,000	370,000
3. . . . . . . . . . . . .	343,000	320,000
4. . . . . . . . . . . . .	343,000	250,000
5. . . . . . . . . . . . .	343,000	25,000
Total	$1,715,000	$1,515,000

PlaytimePlaytime will consider making capital investments only if the payback period of the project is less than 3.5 years and the ARR exceeds​ 8%.

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.Calculate the toy action figure​ project's ARR. If the toy action figure project had a residual value of

$125,000​,would the ARR​ change? Explain and recalculate if necessary. Does this investment pass PlaytimePlaytime​'s ARR screening​ rule?

​First, enter the​ formula, then compute the ARR of the toy action figure project. ​(Enter amounts in​ dollars, not millions. Enter your answer as a percent rounded to two decimal​ places.)

					Accounting
	Average annual operating income from asset	/	Initial investment	=	rate of return

/

1100000

=

%

Answer 1

COMPUTATION OF ARR OF TOY ACTION FIGURE PROJECT

To determine ARR we use the formula

=(Average cash inflows / inital investement) x 100

= (343000 / 1100000) x 100

= 31.2%

b) when the project has a residual value of 125000

The ARR also changes.

Total inflows (343000 x 5)	1715000
Less Depreciation (1100000 - 125000)	975000
Net inflows	740000

Avg inflow ( 740000 / 5) = 148000

Avg investement ( 1100000 + 125000) / 2 = 612500

ARR = (148000 / 612500) x 100

= 24.2%

Therefore the condition of accepting the project when ARR exceeds 8% is satisfied.