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

The simple rate of return for Nick's Novelties, Inc. is calculated to be 1.67%, which is lower than the company's required rate of return of 12%. Therefore, the company will likely not purchase the electronic games.

Step-by-step explanation:

The question asks us to calculate the simple rate of return for Nick’s Novelties, Inc., in the context of purchasing new electronic games for its amusement houses. We'll also determine if the investment meets the company's required rate of return threshold.

To calculate the simple rate of return, we subtract the annual depreciation from the annual net operating income and then divide by the initial investment cost. The formula is as follows:

Simple Rate of Return = (Net Operating Income - Annual Depreciation) / Initial Investment

Using the data provided:

Simple Rate of Return = ($40,000 - $35,000) / $300,000

Simple Rate of Return = $5,000 / $300,000

Simple Rate of Return = 0.0167 or 1.67%

Since the simple rate of return of 1.67% is less than the company’s required rate of return of 12%, Nick’s Novelties will likely decide against purchasing the games.

Answer 2

13.33%

Yes , the recent games should be purchased.

Step-by-step 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%