Required informationSkip to question [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 $672,000, have a fifteen-year useful life, and have a total salvage value of $67,200. The company estimates that annual revenues and expenses associated with the games would be as follows: Revenues $260,000Less operating expenses: Commissions to amusement houses$90,000 Insurance 36,000 Depreciation 40,320 Maintenance 50,000 216,320Net operating income $43,680 Required:1a. Compute the payback 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?

Payback Period: It is the length of the time that is required for an investment to recover its initial outlay in terms of profits or savings. The basic rules, if the payback is less than the maximum time allowed, then invest in the project. But if it is greater than the maximum time allowed then, don't invest in the project.1a. Compute the payback period associated with the new electronic games. 1b. Assuming that Nick’s Novelties will not buy new games unless it offers a payback of 5 years or less, Nick’s Novelties would purchase the new games as the payback period is calculated as 8 years.

Answered: 1a. Compute the payback period…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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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 $672,000, have a fifteen-year useful life, and have a total salvage value of $67,200. The company estimates that annual revenues and expenses associated with the games would be as follows:


Revenues			$	260,000
Less operating expenses:
Commissions to amusement houses	$	90,000
Insurance		36,000
Depreciation		40,320
Maintenance		50,000		216,320
Net operating income			$	43,680

Required:

1a. Compute the payback 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?

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