Required informationExercise 14-8 (Static) Payback Period and Simple Rate of Return [LO14-1, LO14-6][The following information applies to the questions displayed below.]Nick's Novelties, Inc., is considering the purchase of new electronic games to place in its amusement houses. The gameswould cost a total of $300,000, have an eight-year useful life, and have a total salvage value of $20,000. The companyestimates that annual revenues and expenses associated with the games would be as follows:Revenues$200,000Less operating expenses:$100,0007,00035,00018,000Commissions to amusement housesInsuranceDepreciationMaintenance160,000Net operating income$ 40,000Exercise 14-8 Part 2 (Static)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?

Simple rate of return = Net operating income * 100/ Cost of investment

Answered: Simple Rate of Return

Business

Accounting

Simple Rate of Return

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

Required information
Exercise 14-8 (Static) Payback Period and Simple Rate of Return [LO14-1, LO14-6]
[The following information applies to the questions displayed below.]
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:
Revenues
$200,000
Less operating expenses:
$100,000
7,000
35,000
18,000
Commissions to amusement houses
Insurance
Depreciation
Maintenance
160,000
Net operating income
$ 40,000
Exercise 14-8 Part 2 (Static)
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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