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Required information [The following information applies to the questions displayed below.] Nick's Novelties, Incorporated, is considering the purchase of new electronic games to place
Required information [The following information applies to the questions displayed below.] Nick's Novelties, Incorporated, is considering the purchase of new electronic games to place in its amusement houses. The games would cost a total of $475,000, have a fifteen-year useful life, and have a total salvage value of $47,500. The company estimates that annual revenues and expenses associated with the games would be as follows: Revenues Less operating expenses: Commissions to amusement houses Insurance Depreciation Maintenance Net operating income $ 240,000 $ 70,000 45,000 28,500 30,000 173,500 $ 66,500 Required: 1a. Compute the payback period associated with the new electronic games. 1b. Assume that Nick's 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? 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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