Required informationSkip to 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 $672,000, have a fifteen-year useful life, and have a total salvage value of $67,200. The company estimates that annual revenues and expenses associated with the games would be as follows: Revenues $260,000Less operating expenses: Commissions to amusement houses$90,000 Insurance 36,000 Depreciation 40,320 Maintenance 50,000 216,320Net operating income $43,680 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?

Payback Period: It is the length of the time that is required for an investment to recover its…

Answered: 1a. Compute the payback period…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter9: Capital Budgeting And Cash Flow Analysis

Section: Chapter Questions

Problem 14P

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[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 $672,000, have a fifteen-year useful life, and have a total salvage value of $67,200. The company estimates that annual revenues and expenses associated with the games would be as follows:


Revenues			$	260,000
Less operating expenses:
Commissions to amusement houses	$	90,000
Insurance		36,000
Depreciation		40,320
Maintenance		50,000		216,320
Net operating income			$	43,680

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?

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