Nicks Novelties, Incorporated, is considering the purchase of new electronic games to place in its...
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Accounting
Nicks Novelties, Incorporated, is considering the purchase of new electronic games to place in its amusement houses. The games would cost a total of $432,000, have a fifteen-year useful life, and have a total salvage value of $43,200. The company estimates that annual revenues and expenses associated with the games would be as follows:
Revenues
$ 230,000
Less operating expenses:
Commissions to amusement houses
$ 70,000
Insurance
56,000
Depreciation
25,920
Maintenance
50,000
201,920
Net operating income
$ 28,080
Required:
1a. Compute the payback period associated with the new electronic games.
1b. Assume that Nicks Novelties, Incorporated, 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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