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 $304,000, have a fifteen-year useful life, and have a total salvage value of $30,400. The company estimates that annual revenues and expenses associated with the games would be as follows: $250,000 Revenues Less operating expenses: Commissions to amusement houses Insurance Depreciation Maintenance $90,000 54,000 18,240 30,000 192, 240 $ 57,760 Net operating income Required 1a. Compute the pay back period associated with the new electronic games b. 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? Complete this question by entering your answers in the tabs below Req 1A Compute the pay back period associated with the new electronic games Payback Period Req 1B Years

Explanation / Answer

Annual cash flows = 57760+18240= 76000 1a Payback period = 304000/76000 = 4 years 1b Yes, the equipment should be purchased as payback period is less than 5 years

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