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

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Nicks Novelties, Incorporated, is considering the purchase of new electronic games to place in its amusement houses. The games would cost a total of $320,000, have a fifteen-year useful life, and have a total salvage value of $32,000. The company estimates that annual revenues and expenses associated with the games would be as follows:

Revenues $ 200,000Less operating expenses: Commissions to amusement houses$ 60,000 Insurance30,000 Depreciation19,200 Maintenance30,000139,200Net operating income $ 60,800

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?