Nicks Novelties, Inc., is considering the purchase of electronic pinball machines to place in amusement houses. The

Question:

Nick’s Novelties, Inc., is considering the purchase of electronic pinball machines to place in amusement houses. The machines 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 machines would be as follows:

$200,000 Revenues Less operating expenses: Commissions to amusement houses. s100,000 Insurance 7,000 Depreciation 35,000

Required:

1. Assume that Nick’s Novelties, Inc., will not purchase new equipment unless it provides a payback period of five years or less. Would the company purchase the pinball machines?

2. Compute the simple rate of return promised by the pinball machines. If the company requires a simple rate of return of at least 12%, will the pinball machines be purchased?

Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important... Payback Period
Payback period method is a traditional method/ approach of capital budgeting. It is the simple and widely used quantitative method of Investment evaluation. Payback period is typically used to evaluate projects or investments before undergoing them,...