[The following information applies to the questions displayed below. Nick\'s Nov

Question

[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 ho The games would cost a total of $510,000, have an eight-year useful life, and have a total salvage value $51,000. The company estimates that annual revenues and expenses associated with the games would as follows: Revenues $220,000 Less operating expenses Commissions to amusement houses $70,000 Insurance Depreciation Maintenance 25,000 57,375 40,000 192,375 Net operating income $ 27,625 value: 2.00 points Required 1a. Compute the pay back period associated with the new electronic games Payback Period Payback Period Payback period Choose Numerator: Choose Denominator: nvestment required / Annual net cash inflow | 510,000$ 85,0001 6 years

Explanation / Answer

1a) Payback period :

1b) Yes, Company should puchase the new game.

2a) Simple rate of return = Net income*100/Inital investment

= 27625/100/510000

Simple rate of return = 5.4%

2b) No, game will not be purchased.

Payback period Choose numerator / Choose denominator = Payback period Initial investment / Annual cash flow = Payback period 510000 / 85000 = 6 Years

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