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

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?