Revenues . Less operating expenses: Commissions to amusement houses Insurance . Depreciation Maintenance $200,000 $100,000 7,000 35,000 160,000 $ 40,000 18,000 Net operating income
Payback Period and Simple
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 $300,000, have an eight-year useful life, and have a total salvage value of $20,000. The company estimates that annual revenues and expenses associated with the games would be as follows:
Required:
1. What is the payback period for the new electronic games? 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?
2. What is the simple rate of return promised by the games? If the company requires a simple rate of return of at least 12%, will the games be purchased?
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