flow/connecthtesReg true&returnUd; ework The following information applies to th

Question

flow/connecthtesReg true&returnUd; ework The following information applies to the questions displayed below Nick's Novetties, Inc. s considering the purchase of new electronic games to place in its amusement houses. The games would cost a total of $380,000, have a fifteen-year useful life, and have a total salvage value of $38,000. The company estimates that annual revenues and expenses associated with the games would be as follows $380,888 Revenues Less operating expenses: Commissions to anusement houses Insurance Depreciation Maintenance $6e,eee 65,8e0 22,800 8e,800 227,88e Net operating income 5 72,200 Exercise 13-8 Part 1 Required: a. Compute the pay back period assoclated with the new electronic games b. Assume that Nick's Novelties, Inc., will not purchase new games unless they provide a payback period of flve years or less. Would the company purchase the new games? Complete this question by entering your answers in the tabs below. Req IAReq 18

Explanation / Answer

Net Operating Income $72,200 Add: Annual Depreciation $22,800 Annual Free Cash Flow $95,000 Initial Investment (Cost of The Game ) $ 380000 Payback period = Initial Investment / Annual Free Cash Flow = $ 380000/$ 95000 = 4 Years Since the Payback Period is less than 5 years,therefore, The Company should purchase the new game.

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