Required information

Skip to question

[The following information applies to the questions displayed below.]

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		$ 240,000
Less operating expenses:
Commissions to amusement houses	$ 90,000
Insurance	30,000
Depreciation	18,000
Maintenance	60,000	198,000
Net operating income		$ 42,000

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?