Exercise 11-6 Payback Period and Simple Rate of Return [LO11-1, LO11-4]

[The following information applies to the questions displayed below.]

Nicks Novelties, Inc., is considering the purchase of new electronic games to place in its amusement houses. The games would cost a total of $380,000, have an eight-year useful life, and have a total salvage value of $38,000. The company estimates that annual revenues and expenses associated with the games would be as follows:

Revenues

$

300,000

Less operating expenses:

Commissions to amusement houses

$

60,000

Insurance

65,000

Depreciation

42,750

Maintenance

80,000

247,750

Net operating income

$

52,250

Exercise 11-6 Part 1

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 Nicks Novelties, Inc., will not purchase new games unless they provide a payback period of 10 years or less. Would the company purchase the new games?

	A.Yes
	B.No

Exercise 11-6 Part 2

2a.

Compute the simple rate of return promised by the games. (Round your answer to 1 decimal place. i.e. 0.123 should be considered as 12.3%.)

Simple rate of return

%

+

2b.

If the company requires a simple rate of return of at least 12%, will the games be purchased?

	A.Yes
	B.No