Nick's Novelties, Inc. is considering the purchase of electronic pinball machines to place in game arcades. The machines would cost a total of $320,000, have an eight-year useful life, and have a total salvage value of $20,000. The company estimated that annual revenues and expenses associated with the machines would be as follows:

Revenues$242,000Operating expenses:Commissions to game arcades$115,000Insurance9,000Depreciation37,500Maintenance18,000$179,500Net operating income$62,500

Click here to viewExhibit 10-1andExhibit 10-2, to determine the appropriate discount factor(s) using tables.

Required:1-a.Compute the payback period.(Round your answer to 1 decimal place.)

1-b.Assume that Nick's Novelties, Inc. will not purchase new equipment unless it provides a payback period of 4 years of less. Will the company purchase the pinball machines?

YesNo

2-a.Compute the simple rate of return promised by the pinball machines.(Round your answer to 1 decimal place. (i.e., 0.1234 should be considered as 12.3%).)

2-b.If the company requires a simple rate of return of at least 15%, will the pinball machines be purchased?YesNo

3-a.If Nick's Novelties, Inc. has a discount rate of 19%, what is the NPV of this investment? (Hint: Identify the relevant costs and then perform an NPV analysis.)(Negative amount should be indicated with a minus sign. Round discount factor(s) to 3 decimal places.)

3-b.Should the company purchase the pinball machines?YesNo