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Nicks Novelties, Inc., is considering the purchase of new electronic games to place in its amusement houses. The games would cost a total of $240,000,
Nicks Novelties, Inc., is considering the purchase of new electronic games to place in its amusement houses. The games would cost a total of $240,000, have a fifteen-year useful life, and have a total salvage value of $24,000. 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 | $ | 90,000 | |||
Insurance | 30,000 | ||||
Depreciation | 14,400 | ||||
Maintenance | 70,000 | 204,400 | |||
Net operating income | $ | 45,600 | |||
Exercise 12-8 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 12%, will the games be purchased?
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