Question

Required information Exercise 12-8 Payback Period and Simple Rate of Return [LO12-1, LO12-6] [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 $304,000, have a fifteen-year useful life, and have a total salvage value of $30,400. The company estimates that annual revenues and expenses associated with the games would be as follows: Revenues $ 250,000 Less operating expenses: Commissions to amusement houses $ 90,000 Insurance 54,000 Depreciation 18,240 Maintenance 30,000 192,240 Net operating income $ 57,760 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

2a) Simple rate of return = Net income/Initial investment = 57760/304000 = 19%

2b) Yes, game should be purchased because simple rate of return is higher than 12%