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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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