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Exercise 12-8 Payback Period and Simple Rate of Return [LO12-1, LO12-6]

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Nicks Novelties, Inc., is considering the purchase of new electronic games to place in its amusement houses. The games would cost a total of $592,000, have a fifteen-year useful life, and have a total salvage value of $59,200. The company estimates that annual revenues and expenses associated with the games would be as follows:

Revenues				$	300,000
Less operating expenses:
Commissions to amusement houses	$	70,000
Insurance		66,000
Depreciation		35,520
Maintenance		90,000			261,520
Net operating income				$	38,480

Exercise 12-8 Part 2

2a. Compute the simple rate of return promised by the games.