# Nick’s novelties, inc., is considering the purchase of new electronic games to place in its amusement houses. the games would cost

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 \$225,000, have an fifteen-year useful life, and have a total salvage value of \$22,500. the company estimates that annual revenues and expenses associated with the games would be as follows: revenues \$220,000 less operating expenses: commissions to amusement houses \$70,000 insurance 25,000 depreciation 13,500 maintenance 80,000 188,500 net operating income \$31,500 required: a. compute the pay back period associated with the new electronic games. b. 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? i. yesii. no

4 years Yes Explanation: Payback period calculates the amount of time it takes to recover the amount invested in a project to be recovered from the cumulative cash flow. Cash inflow for the period = Net income + Net cash deductions (depreciation expenses) \$60,800 + \$19,200 = \$80,000 Payback period = amount invested / cash inflow \$320,000 / \$80,000 = 4 years If the payback period is five years or less, the project would be accepted because the amount invested would be recovered in 4 years. Therefore, the company would purchase the new games. I hope my answer helps you

Also Read :   From a marginal analysis perspective, what is the inventory carry cost for Andrews if the company carries one additional unit of Axe

Answer and Explanation: 1a. The computation of the payback period is shown below: Payback period = Initial investment ÷ Cash inflow where, Initial investment is \$592,000 And, the cash flow is = Depreciation expense + net operating income = \$35,520 + \$38,480 = \$74,000 So, the payback period is = \$592,000 ÷ \$74,000 = 8 years 1b. As we can see that the payback period is of 8 years but the given payback period is 5 years so the company should not purchased the new games 2a. The computation of the simple rate of return is shown below: Payback period = Net operating income ÷ Initial investment = \$38,480 ÷ \$592,000 = 6.5% 2b. As we can see that the simple rate of return is 6.5% but the given simple rate of return is minimum 8% so the company should not purchased the new games