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 $592,000, have a fifteen-year useful life, and have a total salvage value of $59,200. The company estimates that annual revenues and expenses associated with the games would be as follows:

Revenues				$	300,000
Less operating expenses:
Commissions to amusement houses	$	70,000
Insurance		66,000
Depreciation		35,520
Maintenance		90,000			261,520
Net operating income				$	38,480

Exercise 12-8 Part 1

Required:

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?