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:

1. 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?

2. Compute the simple rate of return promised by the games. If the company requires a simple rate of return of at least 12%, will the games be purchased?

$200,000 Revenues ... Less operating expenses: Commissions to amusement houses Insurance Depreciation Maintenance Net operating income $100,000 7,000 35,000 18,000 160,000 $ 40,000