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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 $300,000, have an eight-year useful life, and have a total salvage value of $45,000. 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		40,000
Depreciation		31,875
Maintenance		50,000			181,875
Net operating income				$	18,125

Required:
1a.	Compute the pay back period associated with the new electronic games.

Payback Period
Choose Numerator:	/	Choose Denominator:	=	Payback Period
Investment required	/	Annual net cash inflow	=	Payback period
$300,000	/	$50,000	=	6	years

1b.

Assume that Nicks Novelties, Inc., will not purchase new games unless they provide a payback period of 8 years or less. Would the company purchase the new games?

	Yes
	No

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

0.1

%

2b.

If the company requires a simple rate of return of at least 10%, will the games be purchased?

	No
	Yes