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 $300,000, have an fifteen-year useful life, and have a total salvage value of $45,000. The company estimates that annual revenues and expenses associated with the games would be as follows:

Revenues

$

200,000

Less operating expenses:

Commissions to amusement houses

$

60,000

Insurance

40,000

Depreciation

17,000

Maintenance

50,000

167,000

Net operating income

$

33,000

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 five years or less. Would the company purchase the new games?

	No
	Yes

Exercise 13-8 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 10%, will the games be purchased?

	Yes
	No