Simple Rate of Return
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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![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?](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F1615ba51-1445-4e50-aa58-9b9340f7c3f8%2F352a46e6-e753-475b-a9d2-015bcef186c1%2Fab4poxi_processed.png&w=3840&q=75)
Transcribed Image Text: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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