Required information The following information applies to the questions displaye

Question

Required information 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 $365,000, have a fifteen-year useful life, and have a total salvage value of $36,500. The company estimates that annual revenues and expenses associated with the games would be as follows Revenues $250,000 Less operating expenses: Commissions to amusement houses Insurance Depreciation Maintenance $80,000 67,000 21,900 30,000 198,900 Net operating income $ 51,100 2a. Compute the simple rate of return promised by the games. 2b. If the company requires a simple rate of return of at least 16%, will the games be purchased?

Explanation / Answer

2a) Simple rate of return = Net income*100/Initial investment

= 51100*100/365000

Simple rate of return = 14%

2b) Company should not purchase the game because simple rate of return is less than 16%

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