The following information applies to the questions displayed below.] Nick\'s Nov
ID: 2583565 • Letter: T
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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 $392,000, have an eight-year useful life, and have a total salvage value of $39,200. The company estimates that annual revenues and expenses associated with the games would be as follows: $300,000 Revenues Less operating expenses: Commissions to $90,000 amusement houses Insurance Depreciation Maintenance 72,000 44,100 40,000 246,100 Net operating income $ 53,900 Required 1a.Compute the pay back period associated with the new electronic games Choose Numerator: Payback Perio Choose Denominator: Payback Period Payback period yea 1b.Assume that Nick's Novelties, Inc., will not purchase new games unless they provide a payback period of 6 years or less. Would the company purchase the new games? O Yes O NoExplanation / Answer
Annual net cash inflow = 53900+44100= 98000 1a Investment required/Annual net cash inflow=Payback period 392000/98000 = 4 years b Yes, the payback period is less than the maximum 6 yearsrequired by the company 2a Simple rate of return=Annual incremental net income/Initial investment =53900/392000=13.8% b Yes, The 13.8% return exceeds 12%
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