Exercise 11-6 Payback Period and Simple Rate of Return [LO11-1, LO11-4] Nick’s N
ID: 2524364 • Letter: E
Question
Exercise 11-6 Payback Period and Simple Rate of Return [LO11-1, LO11-4]
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
Exercise 11-6 Part 1
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?
[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) For calculating Pay back period, we need to calculate net cash inflow per year which is calculated as follows:-
Annual Cash Inflow = Net Operating Income+Non cash deduction for depreciation
= $44,000+$36,000 = $80,000
Payback period = Investment Required/Annual Net Cash Inflow
= $320,000/$80,000 per year = 4 years
1b) Yes, Nick’s Novelties, Inc. should purchase the new games because the payback period is less than the maximum 10 years required by the company. (i.e. 4 years as calculated in part 1a).
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