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Exercise 14-8 (Algo) Payback Period and Simple Rate of Return [LO14-1, LO14-6]

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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 $380,000, have a fifteen-year useful life, and have a total salvage value of $38,000. 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	$ 60,000
Insurance	65,000
Depreciation	22,800
Maintenance	80,000	227,800
Net operating income		$ 72,200

Exercise 14-8 Part 1 (Algo)

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?

1c. Compute the simple rate of return promised by the games.

1d. If the company requires a simple rate of return of at least 12%, will the games be purchased?