Mick's Novelties, Inc. is considering the purchase of electronic pinball machines to place in game arcades. The machines would cost a total of $520,000, have an eight-year useful life, and have a total salvage value of $30,000. The company estimated that annual revenues and expenses associated with the machines would be as follows:
Revenues
$253,000
Operating expenses:
Commissions to game arcades
$125,000
Insurance
6,000
Depreciation
61,250
Maintenance
18,000
210,250
Net operating income
$ 42,750
Click here to view Exhibit 10-1 and Exhibit 10-2, to determine the appropriate discount factor(s) using tables.
Required:
9-a. Compute the payback period. (Round your answer to 1 decimal place.)
Payback period
years
9-b. Assume that Nick's Novelties, Inc. will not purchase new equipment unless it provides a payback period of 6 years or less. Will the company purchase the pinball machines?
Yes
No