Question

ToylandToyland Products is considering producing toy action figures and sandbox toys. The products require different specialized​ machines, each costing ​$11 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	Sandbox toy
	figure project	project
1. . . . . . . . . . . . .	$371,500	$540,000
2. . . . . . . . . . . . .	371,500	340,000
3. . . . . . . . . . . . .	371,500	330,000
4. . . . . . . . . . . . .	371,500	260,000
5. . . . . . . . . . . . .	371,500	40,000
Total	$1,857,500	$1,510,000

ToylandToyland

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 toy action figure​ project's payback period. If the toy action figure project had a residual value of $ 100 comma 000$100,000​, would the payback period​ change? Explain and recalculate if necessary. Does this investment pass ToylandToyland​'s payback period screening​ rule?

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

Answer 1

Toy action figure​ project's payback period.

- The Payback Period Method refers to the period in which the proposed project will generate the cash inflows to recover the Initial Investment costs. It considers only three components such as Initial Investment costs, Economic life of the project and the annual cash inflows

- Payback period is the number of years taken to recover the total amount of money invested in the project. If the payback period is less than the enterprises required number of years, then the project should be accepted, Else it is rejected.

-The Payback Period = Initial Investment / Annual cash inflow

The Payback Period for the Project is calculated by using the following formula

Project’s Payback Period = Initial Investment Cost / Annual Cash Inflow

Toy action figure​ project's payback period.

Payback Period = Initial Investment Cost / Annual Cash Inflow

= $1,000,000 / $371,500 per year

= 2.69 Years

‘Hence, the toy action figure​ project's payback period will be 2.69 Years”