Question: EXERCISE 8-8 Payback Period and Simple Rate of Return.

Nick's 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 $20,000. The company estimates that annual revenues and expenses associated with the games would be as follows:

Required:

1. Assume that Nick's Novelties, Inc., will not purchase new games unless they provide a pay-
   back period of five years or less. Would the company purchase the new games?
2. Compute the simple rate of return promised by the games. If the company requires a simple

rate of return of at least 12%, will the games be purchased?

Price: $2.99

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