Nick’s Novelties, Inc., is considering the purchase of new electronic games to p
ID: 2471478 • Letter: N
Question
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 $320,000, have an eight-year useful life, and have a total salvage value of $32,000. The company estimates that annual revenues and expenses associated with the games would be as follows:
50,000
186,000
44,000
5.
value:
10.00 points
Required information
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 10 years or less. Would the company purchase the new games?
References
eBook & Resources
WorksheetLearning Objective: 11-01 Determine the payback period for an investment.
Difficulty: 1 EasyLearning Objective: 11-04 Compute the simple rate of return for an investment.
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6.
value:
10.00 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 14%, will the games be purchased?
[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 $320,000, have an eight-year useful life, and have a total salvage value of $32,000. The company estimates that annual revenues and expenses associated with the games would be as follows:
Explanation / Answer
1a)Annual cash flow =Net income +depreciation
= 44000 +36000
= 80000
Total cummulative cash flow for 4 years = 80000 *4 = 320000
Payback period :At 4 years ,Total cash flow =Initial investment ,so payback period = 4 years
1b)Yes ,as back period is less than required .
b)simple rate of return = Annual income /Investment
= 44000 /320000
= .1375 or 13.75%
b2) Since Simple rate of return is less than required ,game should not be purchased .
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