Exercise 13-8 Payback Period and Simple Rate of Return [LO13-1, LO13-6] [ The fo

Question

Exercise 13-8 Payback Period and Simple Rate of Return [LO13-1, LO13-6]

[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 a fifteen-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:

Garrison 16e Rechecks 2017-05-22

Exercise 13-8 Part 1

Required:

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 five years or less. Would the company purchase the new games?

Revenues $ 230,000 Less operating expenses: Commissions to amusement houses $ 80,000 Insurance 20,000 Depreciation 19,200 Maintenance 50,000 169,200 Net operating income $ 60,800

Explanation / Answer

Annual cash flows = 60800+19200= 80000 Pay back period=320000/80000 = 4 years b yes, as payback period is less than 5 years

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