Equipment Replacement. Guarantee Insurance Company has been operating a cafeteria for its employees at its headquarters, but it is considering a conversion to a completely automated set of coin vending machines. The old equipment would be sold, and the vending machines would be purchased immediately for cash. A reputable catering firm would take complete responsibility for servicing the vending machines and would simply pay Guarantee a contracted percentage of the gross vending receipts. The following data are available:

Guarantee uses straight-line depreciation without the half-year rule and has a tax rate of 40 percent.
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1. Evaluate the financial aspects of the change in Guarantee's approach to the cafeteria problem by measuring:

(a) Expected change in net annual operating cash flow.

(b) Payback period.

(c) Approximate IRR.
2. Prepare a report highlighting your findings in Part (1) and any nonquantitative variables that you see impacting this decision. Comment on whether and how the nonquantitative variables can be quantified.

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Current cafeteria: Cash revenues per year. Cash expenses per year. $240,000 265,000