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Nicks Novelties, Incorporated, is considering the purchase of new electronic games to place in its amusement houses. The games would cost a total of $350,000, have a fifteen-year useful life, and have a total salvage value of $35,000. 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	$ 90,000
Insurance	20,000
Depreciation	21,000
Maintenance	40,000	171,000
Net operating income		$ 49,000

Required:

1a. Compute the payback period associated with the new electronic games.

1b. Assume that Nicks Novelties, Incorporated, will not purchase new games unless they provide a payback period of five years or less. Would the company purchase the new games?

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[The following information applies to the questions displayed below.]

Nicks Novelties, Incorporated, is considering the purchase of new electronic games to place in its amusement houses. The games would cost a total of $350,000, have a fifteen-year useful life, and have a total salvage value of $35,000. 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	$ 90,000
Insurance	20,000
Depreciation	21,000
Maintenance	40,000	171,000
Net operating income		$ 49,000

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

2b. If the company requires a simple rate of return of at least 12%, will the games be purchased?