Nicks Novelties, Incorporated, is considering the purchase of new electronic games...
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Accounting
Nicks Novelties, Incorporated, is considering the purchase of new electronic games to place in its amusement houses. The games would cost a total of $350,000, have a fifteen-year useful life, and have a total salvage value of $35,000. The company estimates that annual revenues and expenses associated with the games would be as follows:
Revenues
$ 220,000
Less operating expenses:
Commissions to amusement houses
$ 90,000
Insurance
20,000
Depreciation
21,000
Maintenance
40,000
171,000
Net operating income
$ 49,000
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?
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