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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 $300,000, have a fifteen-year useful life, and have a total salvage value of $30,000. The company estimates that annual revenues and expenses associated with the games would be as follows:

Revenues		$ 200,000
Less operating expenses:
Commissions to amusement houses	$ 60,000
Insurance	30,000
Depreciation	18,000
Maintenance	35,000	143,000
Net operating income		$ 57,000

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?