Question
[The following information applies to the questions displayed below.] Nicks Novelties, Inc., is considering the purchase of new electronic games to place in its amusement
[The following information applies to the questions displayed below.]
Nicks Novelties, Inc., is considering the purchase of new electronic games to place in its amusement houses. The games would cost a total of $304,000, have an fifteen-year useful life, and have a total salvage value of $30,400. 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 | 54,000 | |||||
Depreciation | 18,240 | |||||
Maintenance | 30,000 | 192,240 | ||||
Net operating income | $ | 57,760 | ||||
3.
Required:
1a. Compute the pay back period associated with the new electronic games.
1b. Assume that Nicks Novelties, Inc., will not purchase new games unless they provide a payback period of five years or less. Would the company purchase the new games?
Yes | |
No |
4.
Required information
2a. Compute the simple rate of return promised by the games. (Round your answer to 1 decimal place. i.e. 0.123 should be considered as 12.3%.)
2b. If the company requires a simple rate of return of at least 12%, will the games be purchased?
Yes | |
No |
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