Nicks Novelties, Inc., is considering the purchase of new electronic games to place in its amusement houses. The games would cost a total of $510,000, have an eight-year useful life, and have a total salvage value of $51,000. 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

57,375

Maintenance

40,000

192,375

Net operating income

$

27,625

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

	Yes
	No

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 11%, will the games be purchased?

	No
	Yes