Question

Check my work 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 $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: Part 2 of 2 $300,000 10 Revenues Less operating expenses: Commissions to amusement houses Insurance Depreciation Maintenance Net operating income $90,000 72,000 23,520 40,000 points 225,520 $ 74,480 eBook Hint Print 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? References Complete this question by entering your answers in the tabs below. Req 2A Req 2B 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 < Req za Req 2B >

Answer 1

(1)

Simple rate of return = average annual net operating income/average investment

Average investment = (book value at beginning of year 1 + salvage value at the end of useful life)/2

= ($392000 + $39200)/2= $215600

therefore,

simple rate of return = $74480/$215600

= 34.5%

(2)

yes, the the game must be purchased as the estimated simple rate of return is greater than required simple rate of return.