Answer:
Answer explained below
Explanation:
A. Calculation of Payback Period
1. For Toy Action Figure
Total Investment = $ 1,000,000
First Two Years' Net Cash Flow= $ 371500 + $ 371500
= $ 743,000
Balance Investment to be Recovered from Third Year Cash Flow= Total Investment - First-two Year Net Cash Flow
= $ 1,000,000 - $ 743,000
= $ 257,000
Third Year Net Cash Flow = $ 371,500
Payback period = 2 Years + (12MOnths* $ 257000) / $ 371,500
= 2 Years + 8.30 Months
= 2 Years 8.30 Months
2. For Sandbox Toy Project
Total Investment = $ 1,000,000
First Two Years' Net Cash Flow= $ 540000 + $ 390000
= $ 930,000
Balance Investment to be Recovered from Third Year Cash Flow= Total Investment - First-two Year Net Cash Flow
= $ 1,000,000 - $ 930,000
= $ 70,000
Third Year Net Cash Flow = $ 310,500
Payback period = 2 Years + (12 Months* $ 70000) / $ 310,500
= 2 Years + 2.71 Months
= 2 Years 2.71 Months
B. ARR of the Projects
1. For Toy Action Figure
Total Cash Flows (Given) = $1,857,000
Total Investment (Given) = $ 1,000,000
Net Income= Total Cashflows - Total Investment
= $ 1,857,000 - $ 1,000,000
, = $ 857,000
ARR Year basis = ($ 857,000 / $ 1,000,000)*100 / 5 Years
= 17.14%
2. For Sandbox Toy
Total Cash Flows (Given) = $1,535,000
Total Investment (Given) = $ 1,000,000
Net Income= Total Cashflows - Total Investment
= $ 1,535,000 - $ 1,000,000
= $ 535,000
ARR Year basis = ($ 535,000 / $ 1,000,000)*100 / 5 Years
= 10.70%
So, Company Internal Policy for both the Project is Fulfill but as per the calculation shown above company should invest in Toy Action Figure Because It will within the payback period and earn maximum Return to the company,
And
If the Sandbox Toy has $ 200,000 Residual value then also the income will not exceed the Toy figure so answer will not change in this condition also.
