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

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[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 $392,000, have a fifteen-year useful life, and have a total salvage value of $39,200. The company estimates that annual revenues and expenses associated with the games would be as follows:

Revenues				$	270,000
Less operating expenses:
Commissions to amusement houses	$	60,000
Insurance		52,000
Depreciation		23,520
Maintenance		60,000			195,520
Net operating income				$	74,480

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?

Required information

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

Skip to question

[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 $392,000, have a fifteen-year useful life, and have a total salvage value of $39,200. The company estimates that annual revenues and expenses associated with the games would be as follows:

Revenues				$	270,000
Less operating expenses:
Commissions to amusement houses	$	60,000
Insurance		52,000
Depreciation		23,520
Maintenance		60,000			195,520
Net operating income				$	74,480

Exercise 12-8 Part 2

2a. Compute the simple rate of return promised by the games.

2b. If the company requires a simple rate of return of at least 13%, will the games be purchased?