Question

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 $300,000, have an eight-year useful life, and have a total salvage value of $20,000. The company estimates that annual revenues and expenses associated with the games would be as follows: Revenues $ 200,000 Less operating expenses: Commissions to amusement houses $ 100,000 Insurance 7,000 Depreciation 35,000 Maintenance 18,000 160,000 Net operating income $ 40,000 Garrison 16e Rechecks 2017-05-22 Exercise 12-8 Part 2 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?

Answer 1

Answer:

13.33%

Yes , the recent games should be purchased.

Explanation:

Relevant data provided to figure out the simply rate of return is here below:-

Net income = $40,000

Initial investment = $300,000

As per the given question the solution of simple rate of return is provided below:-

Simple rate of return = Net income ÷ Initial investment × 100

= $40,000 ÷ $300,000 × 100

= 0.13333 × 100

= 13.33%

The recent games should be purchased for the reason that simple rate of return exceed least rate of return = Simple rate of return - Least simple rate of return

=  13.33% - 12%

= 1.33%