Seven Day Mini Mart Is Considering Installing Video Games in Its

question 74

Essay

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: $$\begin{array}{l}\begin{array} {|l|l|l| } \hline \text {Video game revenue }&&\$100,000\\\hline \text {Less expenses: }\\\hline \text {Electricity, supplies, etc.} & \$ 2,000 \\\hline \text {Insurance} & 7,000 & \\\hline \text {Maintenance} & 1,000 & \\\hline \text {Depreciation} & 50,000 & 60,000 \\\hline \text {Net income} & & \$ 40,000 \\\hline \\\hline\end{array}\end{array}$$
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?

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Definitions:

Partnership Creation

The process of forming a partnership, which is an agreement where two or more parties agree to share in the management, profits, and losses of a business.

Joint and Several Liability

A legal doctrine under which each party in a lawsuit can be held responsible for the full amount of damages regardless of their individual share of fault.

Unlimited Personal Liability

A legal obligation where individuals can be held fully responsible for the debts and obligations of a business, potentially affecting their personal assets.

Partnership Authority

The legal power granted to a partner to act on behalf of and bind the partnership in business transactions.