Question

SHOW ALL YOUR WORKS FOR YOUR CALCULATIONS: Calculate "Initial investment and Expected annual net cash inflow" Playmore 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. (Click the icon to view the data.) Calculate the toy action figure project's payback period. If the toy action figure project had a residual value of $175,000, would the payback period change? Explain and recalculate if necessary. Does this investment pass Playmore's payback period screening rule? Data Table Calculate the toy action figure project's payback period. First enter the formula, then calculate the payback period. (Enter amounts in dollars, not millions. Round your answer to two decimal places.) Annual Net Cash Inflows 1,100,000 Expected annual net cash inflow 312,500 $ Payback period 3.52 years Toy action Sandbox toy figure project project 312,500 $ 518,000 312,500 380,000 312,500 340,000 312,500 240,000 312,500 50,000 Total 1,562,500 $ 1,528,000 Playmore will consider making capital investments only if the payback period of the project is less than 3.5 years and the ARR exceeds 8%

Answer 1

Initial Investment is given in the question i.e. $1,000,000

Expected annual cash inflow = $312,500

Payback period = Initial investment/Annual inflow

= 1,000,000/312,500

= 3.2 years

Payback period will not change as the residual value would occur at the end of the project and cash flows after payback are not considered by the method.

Yes, it passes as payback period is less than acceptable period of 3.5 years