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

Nicks Novelties, Inc., is considering the purchase of new electronic games to place in its amusement houses. The games would cost a total of $425,000, have a fifteen-year useful life, and have a total salvage value of $42,500. The company estimates that annual revenues and expenses associated with the games would be as follows:

Exercise 13-8 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 five years or less. Would the company purchase the new games?

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

2b. If the company requires a simple rate of return of at least 11%, will the games be purchased?

Revenues $220,000 Less operating expenses: Commissions to amusement houses Insurance Depreciation Maintenance $70,000 25,000 25,500 40,000 160, 500 Net operating income $ 59,500