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

Revenues				$	240,000
Less operating expenses:
Commissions to amusement houses	$	90,000
Insurance		30,000
Depreciation		33,750
Maintenance		60,000			213,750
Net operating income				$	26,250

2.

value: 5.00 points

Required information

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

1b.

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?

	Yes
	No

References

eBook & Resources

WorksheetLearning Objective: 11-01 Determine the payback period for an investment.

Difficulty: 1 EasyLearning Objective: 11-04 Compute the simple rate of return for an investment.

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3.

value: 10.00 points

Required information

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%.)

2b.

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

No