Seven Day Mini Mart Is Considering Installing Video Games in Its

Seven Day Mini Mart is considering installing video games in its stores.The machines cost $300,000 and have an estimated six-year useful life.Ignore income taxes.The following projected income statement is provided:
$\begin{array}{lr}\text { Video game revenue}&&\$100,000\\\text { Tess exnenses:}\\\text { Electricity, Supplies, etc. } & \$ 2,000 \\\text { Insurance } & 7,000 \\\text { Maintenance } & 1,000 \\\text { Depreciation } & \underline{50,000}&\underline{60,000} \\\text { Net income } &&\underline{\$40,000}\end{array}$ Required:
1)Seven Day Mini Mart would like to recoup its original investment in less than five years.Compute the payback period for the video game machine investment.Would you recommend that the machines be purchased? Why or why not?
2)Seven Day Mini Mart's target unadjusted rate of return is 12%.Compute the unadjusted rate of return on the original investment.Would you recommend that the machines be purchased? Why or why not?

Correct Answer:

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1)Payback = $300,000 ÷ ($40,000 + $50,0...

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