A:Nicks Novelties, Incorporated, is considering the purchase of new electronic games to place in its amusement houses. The games would cost a total of $225,000, have a fifteen-year useful life, and have a total salvage value of $22,500. The company estimates that annual revenues and expenses associated with the games would be as follows:

Revenues		$ 220,000
Less operating expenses:
Commissions to amusement houses	$ 70,000
Insurance	25,000
Depreciation	13,500
Maintenance	80,000	188,500
Net operating income		$ 31,500

2a. Compute the simple rate of return promised by the games.

2b. If the company requires a simple rate of return of at least 13%, will the games be purchased?

B:

Nicks Novelties, Incorporated, is considering the purchase of new electronic games to place in its amusement houses. The games would cost a total of $225,000, have a fifteen-year useful life, and have a total salvage value of $22,500. The company estimates that annual revenues and expenses associated with the games would be as follows:

Revenues		$ 220,000
Less operating expenses:
Commissions to amusement houses	$ 70,000
Insurance	25,000
Depreciation	13,500
Maintenance	80,000	188,500
Net operating income		$ 31,500

Required:

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

1b. Assume that Nicks 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?