Nick’s Novelties, Inc., is considering the purchase of new electronic games to p

Question

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 $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:

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Exercise 13-8 Part 2

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?

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

Explanation / Answer

2a Simple rate of return =Net operating income/ Initial investment = 60800/320000= 19% 2b Yes

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