Exercise 13-8 Payback Period and Simple Rate of Return [LO13-1, LO13-6]

[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 $392,000, have an fifteen-year useful life, and have a total salvage value of $39,200. 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

$

90,000

Insurance

72,000

Depreciation

23,520

Maintenance

40,000

225,520

Net operating income

$

74,480

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

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%.)