Question

# The following information applies to the questions displayed below.] Nick’s Novelties, Inc., is considering the purchase...

The following information applies to the questions displayed below.]

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 \$680,000, have an fifteen-year useful life, and have a total salvage value of \$68,000. The company estimates that annual revenues and expenses associated with the games would be as follows:

 Revenues \$ 250,000 Less operating expenses: Commissions to amusement houses \$ 60,000 Insurance 35,000 Depreciation 40,800 Maintenance 70,000 205,800 Net operating income \$ 44,200

2.

value:
2.00 points

Required information

Required:

1a. Compute the pay back 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?

 No Yes

References

eBook & Resources

WorksheetLearning Objective: 08-01 Determine the payback period for an investment.

Difficulty: 1 EasyLearning Objective: 08-06 Compute the simple rate of return for an investment.

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3.

value:
2.00 points

Required information

2a. Compute the simple rate of return promised by the games. (Round your answer to 1 decimal place. i.e. 0.123 should be considered as 12.3%.)

2b. If the company requires a simple rate of return of at least 10%, will the games be purchased?

 No Yes

 Net operating income 44200 Add: Depreciation 40800 Net annual cash flows 85000 1a Investment cost 680000 Divide by Net annual cash flows 85000 Pay back period 8 years 1b No, as payback period is greater than 5 years 2a Net operating income 44200 Divide by Investment 680000 Simple rate of return 6.50% 2b No, as return is less than 10%