Question

[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 $672,000, have an eight-year useful life, and have a total salvage value of $67,200. The company estimates that annual revenues and expenses associated with the games would be as follows: $260,000 Revenues Less operating expenses: Commissions to amusement houses Insurance Depreciation Maintenance $90,000 36,000 75,600 50,000 251,600 Net operating income $ 8,400 T Juw E O 7- A - Ô À Done 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%.) Simple rate of return % 2b. If the company requires a simple rate of return of at least 5%, will the games be purchased? O No Yes

Answer 1

Nick's Novelties Inc.

Solution 2a:

Simple rate of Return = Annual Net operating income / Initial Investment = $8400 / $672000 = 1.25%

Solution 2b:

No, the Games will not be purchased because Simple rate of return is only 1.25% which is less than required 5%.

Mitsui Electronics Ltd.

Solution 1a:

Payback Period
Choose Numerator	/	Choose Denominator	=	Payback Period
Initial investment	/	Annual net Cash inflow	=	Payback Period
$4,94,000	/	$95,000	=	5.2
				Years

Solution 1b:

No, the equipment will not be purchased.

Solution 2a:

Annual Depreciation = Cost / useful life = $494000 / 10 = $49,400

Annual Incremental Net operating income = Annual net cash inflow - Annual Depreciation = $95000 - $49400 = $45,600

Simple rate of Return
Choose Numerator	/	Choose Denominator	=	Simple Rate of Return
Annual Incremental Net operating Income	/	Initial Investment	=	Simple Rate of Return
$45,600	/	$4,94,000	=	9.2%