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 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: Revenues Less operating expenses: $ 200,000 Commissions to amusement houses. Insurance $ 100,000 7,000 Depreciation 35,000 Maintenance 18,000 160,000 Net operating income $ 40,000 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?

EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN:9781337514835
Author:MOYER
Publisher:MOYER
Chapter9: Capital Budgeting And Cash Flow Analysis
Section: Chapter Questions
Problem 14P
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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 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:
Revenues
Less operating expenses:
$ 200,000
Commissions to amusement houses.
Insurance
$ 100,000
7,000
Depreciation
35,000
Maintenance
18,000
160,000
Net operating income
$ 40,000
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?
Transcribed Image Text: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 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: Revenues Less operating expenses: $ 200,000 Commissions to amusement houses. Insurance $ 100,000 7,000 Depreciation 35,000 Maintenance 18,000 160,000 Net operating income $ 40,000 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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