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 $300,000, have a fifteen-year useful life, and have a total salvage value of $30,000. The company estimates that annual revenues and expenses associated with the games would be as follows: Revenues $ 240,000 Less operating expenses: Commissions to amusement houses $ 90,000 Insurance 30,000 Depreciation 18,000 Maintenance 60,000 198,000 Net operating income $ 42,000 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?
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 $300,000, have a fifteen-year useful life, and have a total salvage value of $30,000. The company estimates that annual revenues and expenses associated with the games would be as follows: Revenues $ 240,000 Less operating expenses: Commissions to amusement houses $ 90,000 Insurance 30,000 Depreciation 18,000 Maintenance 60,000 198,000 Net operating income $ 42,000 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?
Chapter9: Capital Budgeting And Cash Flow Analysis
Section: Chapter Questions
Problem 18P
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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 $300,000, have a fifteen-year useful life, and have a total salvage value of $30,000. The company estimates that annual revenues and expenses associated with the games would be as follows:
| Revenues | $ 240,000 | |
|---|---|---|
| Less operating expenses: | ||
| Commissions to amusement houses | $ 90,000 | |
| Insurance | 30,000 | |
| Depreciation | 18,000 | |
| Maintenance | 60,000 | 198,000 |
| Net operating income | $ 42,000 |
2a. Compute the simple
2b. If the company requires a simple rate of return of at least 12%, will the games be purchased?
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