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 $320,000, have a fifteen-year useful life, and have a total salvage value of $32,000. The company estimates that annual revenues and expenses associated with the games would be as follows:   Revenues   $ 230,000 Less operating expenses:     Commissions to amusement houses $ 80,000   Insurance 20,000   Depreciation 19,200   Maintenance 50,000 169,200 Net operating income   $ 60,800     Exercise 14-8 Part 2 (Algo) 2a. Compute the simple rate of return promised by the games. 2b. If the company requires a simple rate of return of at least 14%, will the games be purchased?

FINANCIAL ACCOUNTING
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Chapter1: Financial Statements And Business Decisions
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Exercise 14-8 (Algo) Payback Period and Simple Rate of Return [LO14-1, LO14-6]

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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 $320,000, have a fifteen-year useful life, and have a total salvage value of $32,000. The company estimates that annual revenues and expenses associated with the games would be as follows:

 

Revenues   $ 230,000
Less operating expenses:    
Commissions to amusement houses $ 80,000  
Insurance 20,000  
Depreciation 19,200  
Maintenance 50,000 169,200
Net operating income   $ 60,800

 

 

Exercise 14-8 Part 2 (Algo)

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

2b. If the company requires a simple rate of return of at least 14%, will the games be purchased?

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