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 $225,000, have an fifteen-year useful life, and have a total salvage value of $22,500. The company estimates that annual revenues and expenses associated with the games would be as follows:

Revenues				$	220,000
Less operating expenses:
Commissions to amusement houses	$	70,000
Insurance		25,000
Depreciation		13,500
Maintenance		80,000			188,500
Net operating income				$	31,500

Garrison 15e Recheck 2014-12-29, 03_03_2015_QC_CS-9557

References

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

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?

	Yes
	No

Garrison 15e Recheck 2014-12-29, 03_03_2015_QC_CS-9557

References

eBook & Resources

Expanded tableExercise 13-8 Part 1

Check my work

3.

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%.)

2b.

If the company requires a simple rate of return of at least 13%, will the games be purchased?

	Yes
	No