Nick’s Novelties, Incorporated, is considering the purchase of new electronic games to place in its amusement houses. The games would cost a total of $392,000, have a fifteen-year useful life, and have a total salvage value of $39,200. The company estimates that annual revenues and expenses associated with the games would be as follows:
Nick’s Novelties, Incorporated, is considering the purchase of new electronic games to place in its amusement houses. The games would cost a total of $392,000, have a fifteen-year useful life, and have a total salvage value of $39,200. The company estimates that annual revenues and expenses associated with the games would be as follows:
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Exercise 12-8 (Algo) Payback Period and Simple Rate of Return [LO12-1, LO12-6]
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Nick’s Novelties, Incorporated, is considering the purchase of new electronic games to place in its amusement houses. The games would cost a total of $392,000, have a fifteen-year useful life, and have a total salvage value of $39,200. The company estimates that annual revenues and expenses associated with the games would be as follows:
| Revenues | $ 300,000 | |
|---|---|---|
| Less operating expenses: | ||
| Commissions to amusement houses | $ 90,000 | |
| Insurance | 72,000 | |
| Depreciation | 23,520 | |
| Maintenance | 40,000 | 225,520 |
| Net operating income | $ 74,480 |
Exercise 12-8 Part 2 (Algo)
2a. Compute the simple rate of return promised by the games.
| Simple rate of return % (Round to one decimal place) |
2b. If the company requires a simple rate of return of at least 12%, will the games be purchased? Yes or no?
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