The following Information applies to the questions displayed below.j Nick\'s Nov
ID: 2534622 • Letter: T
Question
The following Information applies to the questions displayed below.j 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 $385,000, have an fifteen-year useful life, and have a total salvage value of $38,500. The company estimates that annual revenues and expenses assoclated with the games would be as follows Revenues $280,000 Less operating expenses: Commissions to amusement houses $80,000 Insurance Depreclation Malntenance 53,000 23,100 70,000 226,100 Net operating Income $ 53,900 value: 1.00 points Required 1a. Compute the pay back period associated with the new electronic games Payback Period Choose Numerator:Choose Denominator:Payback Period Payback period years 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? O Yes 0Explanation / Answer
Answer:
1
Net operating income
53900
Add noncash deduction for depreciation
23100
Annual net cash inflow
77000
The payback computation would be
payback period
Numirator
/
Denominator
=
Investment required
Annual net cash inflow
=
385,000
77000
=
5 year
payback period =5 year
1-a
Yes
Explanation
As the payback period is 5 years
2
Simple rate of return
=Annual incremental net income/Initial investment
=53900/385000
=14%
Simple rate of return
14%
2-b
If Nick's Novelties, Inc., requires a simple rate of return of at least 12%, will the pinball machines be purchased?
Answer: Yes
Explanation
Yes, this machines would be purchased. The 14% return exceeds 12%
______________________________________________________________________
2
Saving
=Cost saved- Additional cost to new machine operated
=15000-7000
=8000
Depricaition
.=Cost/ life years
=57000/10
=$5700 depriation each year
Determine the value of the equipment after considering the salvage of old equipment as follows
=Cost -salvage value of old
=57000-24000
=$33,000
Initial investment=$33000
Now we will calculate the simple rate of return as under
Annual incremental net operating income
=8000-5700
=2300
simple rate of return
Simple rate of return
Numirator
/
Denominator
=
Annual incremental net
operating income
Intial Investment
=
2,300
33000
=
6.97%
simple rate of return=6.97%
Net operating income
53900
Add noncash deduction for depreciation
23100
Annual net cash inflow
77000