Exercise 11-6 Payback Period and Simple Rate of Return [LO111, Lo1-4 [The follow

Question

Exercise 11-6 Payback Period and Simple Rate of Return [LO111, Lo1-4 [The following information applies to Nick's Novelties, Inc., Is considering the purchase of new electronic games to place in its amusement houses The games would cost a total of $300.000, have an eight-year useful life, and have a total salvage value of $45,000. The company estimates that annual revenues and expenses associated with the games would be as follows: the questions displayed below $200,000 Revenues Less operating expenses Commissions to amusement houses Insurance Depreciation Maintenance $60,000 40,000 31,875 50,000 181,875 Net operating income S 18.125

Explanation / Answer

Requirement 1a) Computation of the payback period associated with the new electronic game. Payback period Choose Numerator / Choose Denominator = Payback period Initial Investment / Net Cash inflows = Payback period 300000 / 50000 = 6 Net Cash flows Net operating Income 18125 Add : Depreciation 31875 Net Cash flows 50000 Requirement 1b) Nick's Novelties, Inc. would purchase the new game as it is providing payback period of 8 years or Less i.e 6 years. Simple rate of return = Net Income/initial investment = =18125/(300000-45000)% = 7.107843137

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