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 $720,000, have an eight-year useful life, and have a total salvage value of $72,000. The company estimates that annual revenues and expenses associated with the games would be as follows:

Revenues				$	250,000
Less operating expenses:
Commissions to amusement houses	$	80,000
Insurance		40,000
Depreciation		81,000
Maintenance		40,000			241,000
Net operating income				$	9,000

References

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

value: 14.28 points

Required information

Exercise 11-6 Part 1

Required:
1a.	Compute the pay back period associated with the new electronic games.

1b.

Assume that Nicks Novelties, Inc., will not purchase new games unless they provide a payback period of 9 years or less. Would the company purchase the new games?

	Yes
	No

References

eBook & Resources

WorksheetDifficulty: 1 EasyLearning Objective: 11-04 Compute the simple rate of return for an investment.

Exercise 11-6 Part 1Learning Objective: 11-01 Determine the payback period for an investment.

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information

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%.)