The following information applies to the questions displayed below Nick\'s Novel

ID: 2480182 • Letter: T

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 lts amusement houses The games would cost a total of $390,000, have an eight-year useful lIfe, and have a total salvage value of $39,000. The company estimates that annual revenues and expenses associated with the games would be as follows: Revenues $220,000 Less operating expenses Commissions to amusement houses Insurance Depreciation Maintenance $60,000 55,000 43,875 40,000 198.875 Net operating Income 21,125 value: 1.66 points Required 1a Compute the pay back period associated with the new electronic games Payback Period / Choose Denominator:Payback Period / Annual net cash inflow :. Payback period Choose Numerator Investment required years

Explanation / Answer

Solution :

NET OPERATING INCOME

21125

ADD : DEPRECIATION

43875

ANNUAL NET CASH INFLOW

65000

1.a

PBP = INVESTMENT REQUIRED / ANNUAL NET CASH INFLOW

6 years

(390000/65000)

The company would not purchase as PBP is more than 4 years i.e 6 years