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 $30,000. The company estimates that annual revenues and expenses associated with the games would be as follows:

Revenues

$

200,000

Less operating expenses:

Commissions to amusement houses

$

60,000

Insurance

30,000

Depreciation

33,750

Maintenance

35,000

158,750

Net operating income

$

41,250

A: Compute the pay back period associated with the new electronic games.
B: Assume that Nicks Novelties, Inc., will not purchase new games unless they provide a payback period of 6 years or less. Would the company purchase the new games? C: Compute the simple rate of return promised by the games. D: If the company requires a simple rate of return of at least 11%, will the games be purchased?