Exercise 12-8 (Algo) Payback Period and Simple Rate of Return [LO12-1, LO12-6]

[The following information applies to the questions displayed below.]

Nicks Novelties, Incorporated, is considering the purchase of new electronic games to place in its amusement houses. The games would cost a total of $720,000, have a fifteen-year useful life, and have a total salvage value of $72,000. The company estimates that annual revenues and expenses associated with the games would be as follows:

Revenues		$ 250,000
Less operating expenses:
Commissions to amusement houses	$ 80,000
Insurance	40,000
Depreciation	43,200
Maintenance	40,000	203,200
Net operating income		$ 46,800

Exercise 12-8 Part 1 (Algo)

Required:

1a. Compute the payback period associated with the new electronic games.

1b. Assume that Nicks Novelties, Incorporated, will not purchase new games unless they provide a payback period of five years or less. Would the company purchase the new games?