Nick’s Novelties, Incorporated, is considering the purchase of new electronic games to place in its amusement houses. The games would cost a total of $300,000, have a fifteen-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 18,000   Maintenance 60,000 198,000 Net operating income   $ 42,000   2a. Compute the simple rate of return promised by the games. 2b. If the company requires a simple rate of return of at least 12%, will the games be purchased?

FINANCIAL ACCOUNTING
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ISBN:9781259964947
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Chapter1: Financial Statements And Business Decisions
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Nick’s Novelties, Incorporated, is considering the purchase of new electronic games to place in its amusement houses. The games would cost a total of $300,000, have a fifteen-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 18,000  
Maintenance 60,000 198,000
Net operating income   $ 42,000

 

2a. Compute the simple rate of return promised by the games.

2b. If the company requires a simple rate of return of at least 12%, will the games be purchased?

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