Question
Nicks Novelties, Inc., is considering the purchase of new electronic games to place in its amusement houses. The games would cost a total of $304,000,
Nicks Novelties, Inc., is considering the purchase of new electronic games to place in its amusement houses. The games would cost a total of $304,000, have a fifteen-year useful life, and have a total salvage value of $30,400. The company estimates that annual revenues and expenses associated with the games would be as follows:
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Revenues |
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| $ | 250,000 |
Less operating expenses: |
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Commissions to amusement houses | $ | 90,000 |
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Insurance |
| 54,000 |
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Depreciation |
| 18,240 |
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Maintenance |
| 30,000 |
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| 192,240 |
Net operating income |
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| $ | 57,760 |
Required:
1a. Compute the payback 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?
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