The decision to undertake a new product line is not one to be taken lightly. American Toy Company has the opportunity to enter the laser tag toy market with a product that is significantly ahead of its peers in technology as evidenced by the fact that it has an effective range of more than double most products on the market. Currently called the Zapper, the product would require investing in a new machine for manufacturing and reinstating an older, completely depreciated asset (a packaging machine).
There are several key factors which need to be taken into account, beginning with the machine that would be required. The machine costs $520,000 and has a negligible salvage value because it is so specialized. Similar general purpose machines typically have a salvage value equal to 10 percent of their costs; the removal value of this machine is appropriate for its salvage value, and that is calculated to be five percent of its cost.
Another key factor concerning this machine is its economic life. This is critical in determining the depreciation associated with the machine, and there are no hard and fast rules for calculating the economic life. McNeely has been presented with several options, including the fact that the average life of a toy is three years, which means that the machine can be expected to be of use to the company for three years. However, there are several outstanding examples of toys which have lasted well beyond three years, and given the technological advantage that the Zapper enjoys, it is also likely to have a longer shelf life.
The machine could also be given a life of ten years, which is the amount of time that the company which makes the machine expects it to last. While this is certainly a realistic timeframe that the machine could be used by American Toy, it is unlikely that a laser-based toy will not be obsolete in ten years; while similar toys are likely to be on the market, it is also likely that...