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 eight-year useful life, and have a total salvage value of $20,000. 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	$	100,000
Insurance		7,000
Depreciation		35,000
Maintenance		18,000			160,000
Net operating income				$	40,000

Garrison 16e Rechecks 2017-05-22

Garrison 16e Rechecks 2018-09-25

Exercise 13-8 Part 1

Required:

1a. Compute the payback 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 12%, will the games be purchased?