Reference no: EM132591105

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 $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:

Question 1: Compute the payback period associated with the new electronic games.

Question 2: 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?