Question

Exercise 13-8 Payback Period and Simple Rate of Return [LO13-1,LO13-6]

Nick’s Novelties, Inc., is considering the purchase of newelectronic games to place in its amusement houses. The games wouldcost a total of $225,000, have an fifteen-year useful life, andhave a total salvage value of $22,500. The company estimates thatannual revenues and expenses associated with the games would be asfollows:

Revenues				$	220,000
Less operatingexpenses:
Commissions to amusement houses	$	70,000
Insurance		25,000
Depreciation		13,500
Maintenance		80,000			188,500
Net operatingincome				$	31,500

Garrison 15e Recheck 2014-12-29, 03_03_2015_QC_CS-9557

References

Section BreakExercise 13-8 Payback Period andSimple Rate of Return [LO13-1, LO13-6]

Exercise 13-8 Part 1

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

1b.

Assume that Nick’s Novelties, Inc., will not purchase new gamesunless they provide a payback period of five years or less. Wouldthe company purchase the new games?

	Yes
	No

Garrison 15e Recheck 2014-12-29, 03_03_2015_QC_CS-9557

References

eBook & Resources

Expanded tableExercise 13-8 Part 1

Check my work

3.

Exercise 13-8 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 beconsidered as 12.3%.)

2b.

If the company requires a simple rate of return of at least 13%,will the games be purchased?

	Yes
	No