Exercise $12-8($Static$)$ Payback Period and Simple Rate of Return $[$LO$12-1,$ LO$12-6]$

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Nick$$s Novelties, Incorporated, is considering the purchase of new electronic games to place in its amusement houses. The games would cost a total of $$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:

Revenues $ $200,000$

Less operating expenses:

Commissions to amusement houses $ $100,000$

Insurance $7,000$

Depreciation $35,000$

Maintenance $18,000160,000$

Net operating income $ $40,000$

Exercise $12-8$ Part $1($Static$)$

Required:

$1$a$.$ Compute the payback period associated with the new electronic games.

$1$b$.$ Assume that Nick$$s 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?