Question
Nicks Novelties, Incorporated, is considering the purchase of new electronic games to place in its amusement houses. The games would cost a total of $365,000,
Nicks Novelties, Incorporated, is considering the purchase of new electronic games to place in its amusement houses. The games would cost a total of $365,000, have a fifteen-year useful life, and have a total salvage value of $36,500. 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 | 67,000 | |
Depreciation | 21,900 | |
Maintenance | 30,000 | 198,900 |
Net operating income | $ 51,100 |
Exercise 14-8 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?
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