Question

Playland Products is considering producing toy action figures and sandbox toys. The products require different specialized machines, each costing $12 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 sandbox toy project's payback period. If the sandbox toy project had a residual value of $150,000, would the payback period change? Explain and recalculate if necessary. Does this investment pass Playland's payback period screening rule? Calculate the sandbox toy project's payback pe od. First, enter the formula, then calculate the payback period. (Enter amounts in dollars, not millions. Round your answer to two decimal places. Abbreviation used: Amt. = Amount.) Full years ( Amt. to complete recovery in next year Projected net cash inflow in next year ) Payback years

Answer 1

Full years	+	(	Amt. to complete recovery in next year	/	Projected net cash inflow in next year	)	=	Payback
2	+	(	285000	/	320000	)	=	2.89 years

Cost of machine= $1200000

Amt. to complete recovery in next year= $1200000-525000-390000= $285000

If the investment had a $150000 residual value, the payback period will not be affected. The cash inflow from any residual value would occur at the end of the asset's useful operating life and will not taken into account when calculating the payback period.

The payback period if the sandbox toy project has a residual value of $150000 is 2.89 years.

The payback period is less than 3.5 years, so it passes the screening rule.