Exercise 11-6 Payback Period and Simple Rate of Return [LO11-1, LO11-4] Nick’s N
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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 $720,000, have an eight-year useful life, and have a total salvage value of $72,000. The company estimates that annual revenues and expenses associated with the games would be as follows:
40,000
241,000
9,000
References
Section BreakExercise 11-6 Payback Period and Simple Rate of Return [LO11-1, LO11-4]
value:
14.28 points
Required information
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 9 years or less. Would the company purchase the new games?
References
eBook & Resources
WorksheetDifficulty: 1 EasyLearning Objective: 11-04 Compute the simple rate of return for an investment.
Exercise 11-6 Part 1Learning Objective: 11-01 Determine the payback period for an investment.
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information
Exercise 11-6 Part 2
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%.)
[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 $720,000, have an eight-year useful life, and have a total salvage value of $72,000. The company estimates that annual revenues and expenses associated with the games would be as follows:
Explanation / Answer
1(a) Payback period = Net initial investment/ Annual net cash flows.
Annual net cash flows = Net operating income (cash) + Salvage value
Since Depreciation is a non cash expense, so we have to add back it to the net operating income to calculate Net cash flows from operating income
Annual net cash flows= $9000+$40000+$72000 = $ 121000
Payback period = 720000/121000 = 5.95 years
1b Yes. Since the payback period is 5.95 or 6 years (after rounding off), which is less than 9 years required, so company should purchase the new games.
2a. Simple rate of return = Accounting Profit / Initial investment
= 9000/720000= 1.2%
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