Exercise 13-8 Payback Period and Simple Rate of Return [LO13-1, LO13-6]

[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 $320,000, have a fifteen-year useful life, and have a total salvage value of $32,000. 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 $ 80,000
Insurance 20,000
Depreciation 19,200
Maintenance 50,000 169,200
Net operating income $ 60,800
Garrison 16e Rechecks 2017-05-22

Exercise 13-8 Part 1

Required:

1a. Compute the pay back 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?

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

whole quiz

1. the sum of all activities involved in getting high-quality products into the marketplace

2.operations

3. the principle of looking at the supply chain as a whole in order to improve the overall flow through the system.

4. produced; performed

5. activities producing tangible products, such as radios, newspapers, buses, and textbooks.

6. activities producing intangible and tangible products, such as entertainment, transportation, and education.

7.   customer focus

8. analyzing a competitor's products to identify desirable improvements

9. the systematic direction and control of the processes that transform resources into finished projects that create value for and provide benefits to consumers.

10. operation management.

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