Question

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

Answer 1

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%