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Exercise 12-8 (Algo) Payback Period and Simple Rate of Return [LO12-1, LO12-6] Skip to question...

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Accounting

Exercise 12-8 (Algo) Payback Period and Simple Rate of Return [LO12-1, LO12-6] Skip to question [The following information applies to the questions displayed below.] Nicks 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 $ 200,000
Less operating expenses:
Commissions to amusement houses $ 60,000
Insurance 30,000
Depreciation 18,000
Maintenance 35,000 143,000
Net operating income $ 57,000

Exercise 12-8 Part 2 (Algo)

2a. Compute the simple rate of return promised by the games.

2b. If the company requires a simple rate of return of at least 11%, will the games be purchased?

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