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Exercise 11-6 Payback Period and Simple Rate of Return [LO11-1, LO11-4]

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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 $380,000, have an eight-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		42,750
Maintenance		80,000			247,750
Net operating income				$	52,250
						Exercise 11-6 Part 1 Required: 1a. Compute the pay back period associated with the new electronic games. Payback Period Choose Numerator: / Choose Denominator: = Payback Period / = Payback period / = years + 1b. Assume that Nicks Novelties, Inc., will not purchase new games unless they provide a payback period of 10 years or less. Would the company purchase the new games? A.Yes B.No Exercise 11-6 Part 2 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 % + 2b. If the company requires a simple rate of return of at least 12%, will the games be purchased? A.Yes B.No

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