Nicks Novelties, Inc., is considering the purchase of new electronic games to place in its amusement houses. The games would cost a total of $304,000, have an fifteen-year useful life, and have a total salvage value of $30,400. The company estimates that annual revenues and expenses associated with the games would be as follows:

Revenues		$250,000
Les operating expenses:
Commissions to amusement houses	$90,000
Insurance	$54,000
Depreciation	$18,240
Maintenance	$30,000	$192,240
Net operating income		$57,760

Required:

1a.

Compute the pay back period associated with the new electronic games.

Choose numerator	/	Choose denominator	=	Payback period
investment required	/	annual net cash inflow	=	Payback period
$304,000	/	$76,000	=	4 years

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? YES!

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%.)

simple rate of return

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