Required information Exercise 12-8 Payback Period and Simple Rate of Return [LO12-1, LO12-6] [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 $304,000, have a fifteen-year useful life, and have a total salvage value of $30,400. 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 $ 90,000
Insurance 54,000
Depreciation 18,240
Maintenance 30,000 192,240
Net operating income $ 57,760
Exercise 12-8 Part 1
Required:
1a. Compute the payback 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?