rueeret urnUri https%3A%2F%2fconnectn Saved omework Exercise 13-8 Payback Period

Question

rueeret urnUri https%3A%2F%2fconnectn Saved omework Exercise 13-8 Payback Period and Simple Rate of Return (LO13-1 LO13-6] LThe following information applies to the questlons dlsplayed 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 $380.000, have a fifteen-year useful life, and have a total salvage value of $38,000. The company estimates s that annual revenues and expenses associated with the games would be as follows: Revenues $30e,00 Less operating expenses Commissions to amusement houses Insurance Depreciation Maintenance $6e,eee 65,898 22,880 88,888 227,880 Net operating income 72,28e Exercise 13-8 Part 2 2a Compute the simple rate of return promised by the games. Z. If the company requires a simple rate of return of at least 12%, will the games be purchased? Complete this question by entering your answers in the tabs below. Req 2A Req 28

Explanation / Answer

Initial Cost        3,80,000 Annual Income            72,200 ROI 19% Since ROI >12%, it should be purchased Year Cash Flow Cummulative 0       -3,80,000 -3,80,000 1            95,000 -2,85,000 2            95,000 -1,90,000 3            95,000      -95,000 4            95,000                 -   5            95,000        95,000 6            95,000    1,90,000 7            95,000    2,85,000 8            95,000    3,80,000 9            95,000    4,75,000 10            95,000    5,70,000 11            95,000    6,65,000 12            95,000    7,60,000 13            95,000    8,55,000 14            95,000    9,50,000 15        1,33,000 10,83,000 Pay back period is 4 years 95000(OCF)=72200 (Net Income)+22800(Depn)

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