Nicks Novelties, Inc., is considering the purchase of new electronic games to place in its amusement houses. The games would cost a total of $392,000, have an eight-year useful life, and have a total salvage value of $39,200. The company estimates that annual revenues and expenses associated with the games would be as follows:

Revenues				$	270,000
Less operating expenses:
Commissions to amusement houses	$	60,000
Insurance		52,000
Depreciation		44,100
Maintenance		60,000			216,100
Net operating income				$	53,900

1.

value: 16.66 points

Required information

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

	Yes
	No

References

eBook & Resources

WorksheetLearning Objective: 11-01 Determine the payback period for an investment.

Difficulty: 1 EasyLearning Objective: 11-04 Compute the simple rate of return for an investment.

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2.

value: 16.66 points

Required information

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