Question

Required information Exercise 12-8 Payback Period and Simple Rate of Return (L012-1, LO12-6) [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 $385,000, have a fifteen-year useful life, and have a total salvage value of $38,500. The company estimates that annual revenues and expenses associated with the games would be as follows: $280,000 Revenues Less operating expenses: Commissions to amusement houses Insurance Depreciation Maintenance Net operating income $80,000 53,000 23, 100 70,000 226, 100 $ 53,900 Exercise 12-8 Part 1 Required: 1a. Compute the payback 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? Complete this question by entering your answers in the tabs below. Req 1A Reg 1B Compute the payback period associated with the new electronic games. Payback Period years < Req 1A Req 1B >

Answer 1

1a. Let us know the annual cash inflow.

=> Annual estimated net operating income + depreciation

=>$53,900+23,100

=>$77,000.

Payback period in case of uniform cash inflows every year = total cost / annual cash inflow

=>$385,000 / 77,000

=>5 years.

1b.Yes.

Since the payback period is 5 years, the company will purchase the new games.