Forte Products is considering producing MP3 players and

Forte Products is considering producing MP3 players and digital video recorders (DVRs). The products require different specialized machines, each costing $1.1 million. Each machine has a five-year life and zero residual value. The two products have different patterns of predicted net cash inflows:

Data:

Calculate the DVR project’s payback period. If the DVR project had a residual value of $150,000, would the payback period change? Explain and recalculate if necessary. Does this investment pass Forte’s payback period screening rule?

Part 1:

Word Options for Fill-in-the-Blank Payback formula above: First Blank:

• Full years, partial years,

Second Blank:

• Amount to complete recovery in the next year, initial investment, residual value, total net cash inflows

Third Blank:

• Expected annual net cash inflow, future value, projected net cash inflow in next year, residual value, total net cash inflows

If the DVR project had a residual value of $150,000 would the payback period change? Explain and recalculate if necessary.

If the investment had a $150,000 residual value, the payback period (would, would not be) affected. The cash inflow from any residual value would occur (at the beginning, at the end of) the asset’s useful operating life and (is, is not) taken into account when calculating the payback period.

Part 2:

The payback period if the DVR project had a residual value of $150,000 is ________________.

Does this investment pass Forte’s payback period screening rule?

The payback period is (equal to, less than, more than) 3.5 years, so it (does not pass, passes) Forte’s initial screening.