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.
Check my work
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% |
Get Answers For Free
Most questions answered within 1 hours.