Nick's Novelties, Inc., is considering the purchase of new electronic games to place in its amusement...
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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. Less operating expenses: Commissions to amusement houses Insurance Depreciation Maintenance Net operating income $100,000 7,000 35,000 18,000 $200,000 160.000 $ 40.000 Required: 1. What is the payback period for the new electronic games? Assume that Nick's Novelties. Inc., will not purchase new games unless they provide a payback period of five years or less. Would the company purchase the new games? 2. What is 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? Derrick Iverson is a divisional manager for Holston Company. His annual pay raises are largely determined by his division's return on investment (ROI), which has been above 20% each of the last three years. Derrick is considering a capital budgeting project that would require a $3,000,000 investment in equipment with a useful life of five years and no salvage value. Holston Company's discount rate is 15% The project would provide net operating income cach year for five years as follows: Required: 1. 2 3. Sales.. Variable expenses Contribution margin Fixed expenses: Advertising, salanes, and other fixed out-of-pocket costs Depreciation... Total fixed expenses Net operating income $600,000 600.000 $2,500,000 1,000,000 1,500,000 1,200.000 $ 300,000 Compute the project's net present value. Compute the project's simple rate of return. Would the company want Derrick to pursue this investment opportunity? Would Derrick be inclined to pursue this investment opportunity? Explain. EXERCISE 12-10 Net Present Value Analysis LO 12-2 Kathy Myers frequently purchases stocks and bonds, but she is uncertain how to determine the rate of return that she is earning. For example, three years ago she paid $13,000 for 200 shares of Malti Company's common stock. She received a $420 cash dividend on the stock at the end of each year for three years. At the end of three years, she sold the stock for $16,000. Kathy would like to earn a return of at least 14% on all of her investments. She is not sure whether the Malti Company stock provide a 14% return and would like some help with the necessary computations. Required: 1. Compute the net present value that Kathy earned on her investment in Malti Company stock. Round your answer to the nearest whole dollar. 2. Did the Malti Company stock provide a 14% return? 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. Less operating expenses: Commissions to amusement houses Insurance Depreciation Maintenance Net operating income $100,000 7,000 35,000 18,000 $200,000 160.000 $ 40.000 Required: 1. What is the payback period for the new electronic games? Assume that Nick's Novelties. Inc., will not purchase new games unless they provide a payback period of five years or less. Would the company purchase the new games? 2. What is 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? Derrick Iverson is a divisional manager for Holston Company. His annual pay raises are largely determined by his division's return on investment (ROI), which has been above 20% each of the last three years. Derrick is considering a capital budgeting project that would require a $3,000,000 investment in equipment with a useful life of five years and no salvage value. Holston Company's discount rate is 15% The project would provide net operating income cach year for five years as follows: Required: 1. 2 3. Sales.. Variable expenses Contribution margin Fixed expenses: Advertising, salanes, and other fixed out-of-pocket costs Depreciation... Total fixed expenses Net operating income $600,000 600.000 $2,500,000 1,000,000 1,500,000 1,200.000 $ 300,000 Compute the project's net present value. Compute the project's simple rate of return. Would the company want Derrick to pursue this investment opportunity? Would Derrick be inclined to pursue this investment opportunity? Explain. EXERCISE 12-10 Net Present Value Analysis LO 12-2 Kathy Myers frequently purchases stocks and bonds, but she is uncertain how to determine the rate of return that she is earning. For example, three years ago she paid $13,000 for 200 shares of Malti Company's common stock. She received a $420 cash dividend on the stock at the end of each year for three years. At the end of three years, she sold the stock for $16,000. Kathy would like to earn a return of at least 14% on all of her investments. She is not sure whether the Malti Company stock provide a 14% return and would like some help with the necessary computations. Required: 1. Compute the net present value that Kathy earned on her investment in Malti Company stock. Round your answer to the nearest whole dollar. 2. Did the Malti Company stock provide a 14% return?
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1 When the Payback Period is computed after discounting the cash flows by a predetermined rate cutoff rate it is called as the discounted payback peri... View the full answer
Related Book For
Managerial Accounting
ISBN: 978-0697789938
13th Edition
Authors: Ray H. Garrison, Eric W. Noreen, Peter C. Brewer
Posted Date:
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