Required information [The following information applies to the questions display

Question

Required information [The following information applies to the questions displayed below.] 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 $310,000, have a fifteen-year useful life, and have a total salvage value of $31,000. The company estimates that annual revenues and expenses associated with the games would be as follows Revenues $280,000 Less operating expenses: Commissions to amusement houses Insurance Depreciation Maintenance $90,000 58,000 18,600 70,000 236,600 Net operating income 43,400 Required 1a. Compute the pay back period associated with the new electronic games 1b. Assume that Nick's Novelties, Inc., will not purchase new games unless they provide a payback period of five years or less. Would the company purchase the new games?

Explanation / Answer

1a.

Cash inflows = Net income + depreciation

= $43400 + $18600

= $62000.

Payback period = $310000 / $62000

= 5 years

1b. Yes, pinball machines would be purchased. The payback period is 5 years.

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