Reference no: EM131771511
Nick's Novelties, Inc is considering the purchase of the 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:
Commission to amusement houses: $100,000
Insurance :$7,000
Depreciation : 35,000
Maintenance : 18,000 $160,000
Net Operating Income $40,000
Assuming Nick's Novelties, Inc will not purchase new games unless they proved a pay back period of 5 years or less. Would the company purchase the new games?
Compute the simple rate of return promised by the games. If the company requires a simple rate of return of at least 12%, will the games be purchased?
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