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

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Nick's Novelties, Inc., is considering the purchase of new electronic games to place in its amusement houses. The games would cost a total of $432,000, have a fifteen-year useful life, and have a total salvage value of $43,200. The company estimates that annual revenues and expenses associated with the games would be as follows:

Revenues$230,000 Less operating expenses:Commissions to amusement houses$70,000Insurance56,000Depreciation25,920Maintenance50,000201,920 Net operating income$28,080

Exercise 12-8 Part 1

Required:

1a. Compute the payback period associated with the new electronic games.

1b. Assume that Nick's 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?