Question
Required information Exercise 12-8 Payback Period and Simple Rate of Return [LO12-1, LO12-6] [The following information applies to the questions displayed below.] Nicks Novelties, Inc.,
Required information Exercise 12-8 Payback Period and Simple Rate of Return [LO12-1, LO12-6] [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 $300,000, have a fifteen-year useful life, and have a total salvage value of $45,000. 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 40,000 Depreciation 17,000 Maintenance 50,000 167,000 Net operating income $ 33,000 Exercise 12-8 Part 1 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? 2a. Compute the simple rate of return promised by the games. 2b. If the company requires a simple rate of return of at least 10%, will the games be purchased?
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