IThe following informauion applies to the questions displayed below Nick\'s Nove

Question

IThe following informauion 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 $392,000, have an eight-year useful life, and have a total salvage value of $39,200. The company estimates that annual revenues and expenses associated with the games would be as follows: $300,000 Less operating expenses: Commissions to amusement houses Insurance Depreciation Maintenance $90,000 72,000 44,100 40.000 246,100 Net operating income $ 53,900 value 2.00 points Required: 1a. Compute the pay back period associated with the new electronic games Payback Period Choose Denominator Payback Period Payback period Choose Numerator: years 1b. Assume that Nick's Novelties, Inc., will not purchase new games unless they provide a payba 0 Type here to search

Explanation / Answer

1a Net operating income 53900 Add noncash deduction for depreciation 44100 Annual net cash inflow 98000 Payback period=Investment required/Annual net cash inflow 392000/98000 4 Years 2a Simple rate of return=Annual incremental net income/Initial investment 53900/392000 13.75% 2b Yes, the games would be purchased as the 13.75% return exceeds 12%

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