Refer to the Medley Products Data Set. Calculate the MP3-player project's ARR. If the MP3 project had a residual value of $125,000, would the ARR change? Explain and recalculate if necessary. Does this investment pass Medley's ARR screening rule?
Medley Products Data Set
Medley Products is considering producing MP3 players and digital video recorders (DVRs).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 MP3 Players DVRs
1 .................................................. $ 332,000............................. $ 500,000
2 .................................................... 332,000................................ 380,000
3 .................................................... 332,000................................ 320,000
4 .................................................... 332,000................................ 280,000
5 .................................................... 332,000................................. 25,000
Total ......................................... $1,660,000............................. $1,505,000
Medley will consider making capital investments only if the payback period of the project is less than 3.5 years and the ARR exceeds 8%.