Question

Required information 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 $325,000, have a fifteen-year useful life, and have a total salvage value of $32,500. The company estimates that annual revenues and expenses associated with the games would be as follows: Revenues $220,000 Less operating expenses Commissions to amusement houses $60,000 55,000 19,500 40,000 Insurance Depreciation Maintenance 174,500 Net operating income $ 45,500 2a. Compute the simple rete of return promised by the games. 2b. If the company requires a simple rate of return of at least 15% , will the games be purchased? Complete this question by entering your answers in the tabs below. Req Req 28 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 retun %

Answer 1

2a
Net operating income	45500
Divide by Investment cost	325000
Simple rate of return	14%

2b

NO, the games will not be purchased.

The Simple rate of return of 14% is less than required rate of return of 15%