Exercise 11-6 Payback Period and Simple Rate of Return [LO11-1, LO11-4] Nick’s N
ID: 2591447 • Letter: E
Question
Exercise 11-6 Payback Period and Simple Rate of Return [LO11-1, LO11-4]
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 $20,000. The company estimates that annual revenues and expenses associated with the games would be as follows:
18,000
160,000
40,000
References
Section BreakExercise 11-6 Payback Period and Simple Rate of Return [LO11-1, LO11-4]
3.
Required information
Exercise 11-6 Part 1
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?
[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 $300,000, have an eight-year useful life, and have a total salvage value of $20,000. The company estimates that annual revenues and expenses associated with the games would be as follows:
Explanation / Answer
1a Annual cash flows= Net operating income + Depreciation=40000+35000 = 75000 Pay back period =300000/75000 = 4 years 1b Yes
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