Exercise 13-8 Payback Period and Simple Rate of Return [LO13-1, LO13-6]

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

Nicks Novelties, Inc., is considering the purchase of new electronic games to place in its amusement houses. The games would cost a total of $332,000, have a fifteen-year useful life, and have a total salvage value of $33,200. The company estimates that annual revenues and expenses associated with the games would be as follows:

Revenues				$	280,000
Less operating expenses:
Commissions to amusement houses	$	80,000
Insurance		57,000
Depreciation		19,920
Maintenance		60,000			216,920
Net operating income				$	63,080

Required:

1a. Compute the pay back period associated with the new electronic games.

1b. Assume that Nicks 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?

1.___ years

2. yes/no