Toy World Products is considering producing toy action figures and sandbox toys.
ID: 2585657 • Letter: T
Question
Toy World 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.
Toy World 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 tho san bo to roiect's ARR f th sandbox toy pro ct had residual value of $175 uld the ARR change? Explain and recalculate f necessary. Does this investment pass Toy World's ARR screening rule? First, enter the formula, the compute the ARR of the sanbox toyprojet. (Enter amcunts in collars, rnot millions. Enler your answer as a percent rounded te two decimal places) Data Table Accounting - rale of relurT Average annual operating income from asset 100,000 Initial investment 1,000,000 10.00 % Annuel Net Cash Inflows f the sandbox toy project had a residual valuc of S175,000, would the ARR change? Explain and recalculate if necessary If the sandbox toy project had a $175,000 residual value, the ARR would age. The residual value wouls cause he yearly depreciation expenseto dereasech wll ause the average annual operaling inome from the investment tu increase Enter your answer ss a percent rounded to two decimal places.) The ARR of the sandbox oy project with a residual value of $175,000 would be Year Toy action Sandbox toy figure project project 371.500 371,500 371,500 371,500 371,500 1.857.500 520,000 360,000 320,000 280,000 20,000 1.500.000 Total Toy Workd will consider making capilal inveslments only if the payback period of the project is less than 3.5 years and the ARR exceeds 8% Print DoneExplanation / Answer
Annual depreciation= (cost-residual vlaue)/year
=(1000000-0)/5=200000
Average accounting income for year 1= 520000-200000=320000
Year 2=360000-200000=160000
Year 3=320000-200000=120000
Year 4=280000-200000=80000
Year 5=20000-200000=-180000
Average accounting income=(320000+160000+120000+80000-180000)/5
=100000
Average investment=1000000
ARR=100000/1000000=10%
If residual value =175000
Annual depreciation= (cost-residual vlaue)/year
=(1000000-175000)/5=165000
Average accounting income for year 1= 520000-165000=355000
Year 2=360000-165000=195000
Year 3=320000-165000=155000
Year 4=280000-165000=115000
Year 5=20000-165000+175000=30000
Average accounting income=(355000+195000+155000+115000+30000)/5
=170000
Average investment=1000000
ARR=170000/1000000=17%
Yes it will change and it is more now.
Yes it has passes the ARR rule
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