LLL 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: Annual Net Cash Inflows Year Toy action figure project Sandbox toy project Year 1. . . . . . . . . . . $428,750 $520,000 Year 2. . . . . . . . . . . 428,750 390,000 Year 3. . . . . . . . . . . 428,750 300,000 Year 4. . . . . . . . . . . 428,750 280,000 Year 5. . . . . . . . . . . 428,750 50,000 Total $2,143,750 $1,540,000 LLL will consider making capital investments only if the payback period of the project is less than 3.5 years and the ARR exceeds 8%. Calculate the sandbox toy project's payback period. If the sandbox toy project had a residual value of $225,000, would the payback period change? Explain and recalculate if necessary. Does this investment pass LLL's payback period screening rule?
LLL 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: Annual Net Cash Inflows Year Toy action figure project Sandbox toy project Year 1. . . . . . . . . . . $428,750 $520,000 Year 2. . . . . . . . . . . 428,750 390,000 Year 3. . . . . . . . . . . 428,750 300,000 Year 4. . . . . . . . . . . 428,750 280,000 Year 5. . . . . . . . . . . 428,750 50,000 Total $2,143,750 $1,540,000 LLL will consider making capital investments only if the payback period of the project is less than 3.5 years and the ARR exceeds 8%. Calculate the sandbox toy project's payback period. If the sandbox toy project had a residual value of $225,000, would the payback period change? Explain and recalculate if necessary. Does this investment pass LLL's payback period screening rule?
Cornerstones of Cost Management (Cornerstones Series)
4th Edition
ISBN:9781305970663
Author:Don R. Hansen, Maryanne M. Mowen
Publisher:Don R. Hansen, Maryanne M. Mowen
Chapter19: Capital Investment
Section: Chapter Questions
Problem 9E: Each of the following scenarios is independent. All cash flows are after-tax cash flows. Required:...
Related questions
Question
LLL 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:
|
Annual Net Cash Inflows
|
|
---|---|---|
Year
|
Toy action figure project
|
Sandbox toy project
|
Year 1. . . . . . . . . . .
|
$428,750
|
$520,000
|
Year 2. . . . . . . . . . .
|
428,750
|
390,000
|
Year 3. . . . . . . . . . .
|
428,750
|
300,000
|
Year 4. . . . . . . . . . .
|
428,750
|
280,000
|
Year 5. . . . . . . . . . .
|
428,750
|
50,000
|
Total
|
$2,143,750
|
$1,540,000
|
LLL will consider making capital investments only if the payback period of the project is less than 3.5 years and the ARR exceeds 8%.
Calculate the sandbox toy project's payback period. If the sandbox toy project had a residual value of $225,000, would the payback period change? Explain and recalculate if necessary. Does this investment pass LLL's payback period screening rule?
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 3 steps with 2 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.Recommended textbooks for you
Cornerstones of Cost Management (Cornerstones Ser…
Accounting
ISBN:
9781305970663
Author:
Don R. Hansen, Maryanne M. Mowen
Publisher:
Cengage Learning
Principles of Accounting Volume 2
Accounting
ISBN:
9781947172609
Author:
OpenStax
Publisher:
OpenStax College
Managerial Accounting: The Cornerstone of Busines…
Accounting
ISBN:
9781337115773
Author:
Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger
Publisher:
Cengage Learning
Cornerstones of Cost Management (Cornerstones Ser…
Accounting
ISBN:
9781305970663
Author:
Don R. Hansen, Maryanne M. Mowen
Publisher:
Cengage Learning
Principles of Accounting Volume 2
Accounting
ISBN:
9781947172609
Author:
OpenStax
Publisher:
OpenStax College
Managerial Accounting: The Cornerstone of Busines…
Accounting
ISBN:
9781337115773
Author:
Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger
Publisher:
Cengage Learning