Problem 1 (8 points total - 2 points each) 26) Seven Day Mini Mart is considerin

Question

Problem 1 (8 points total - 2 points each) 26) Seven Day Mini Mart is considering installing video games in its stores. The machines cost S300,000 and have an estimated six-year useful life. Ignore income taxes. The following projected income statement is provided: 100,000 Video game revenue Less expenses Electricity, supplies, etc Insurance Maintenance Depreciation $2,000 7000 1,000 50,00060,000 40,000 Net ncome Required: ) Seven Day Mini Mart would like to recoup its original investment in less than five years. Compute the payback period for the video game machine investment. Would you recommend that the machines purchased? Why or why not? be 2) Seven Day Mini Mart's target unadjusted rate of return is 12%. Compute the unadjusted rate of return on the original investment. Would you recommend that the machines be purchased? Why or why not? 2.

Explanation / Answer

Net income 40000 Add: Depreciation 50000 Cash inflow per year 90000 1 Payback period=Cost of investment/Cash inflow per period=300000/90000=3.33 years Purchase of machine is preferred since payback period is less than 5. 2 Target unadjusted rate of return=12%. Target return=intial investment*Unadjusted rate of return=300000*12%=36000 Net present value using unadjusted rate of return Present value of cashinflows@12% for 5 years=90000*4.1114=370026 Net present value=370026-300000=70026 Purchase of machine is preferred since present value of returns are more than target return

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