Question
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
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 Operating expenses: Commissions to game arcades Insurance Depreciation Maintenance Net operating income $242,000 $115,000 9,000 37,500 18,000 179,500 $ 62,500 Click here to view Exhibit 10-1 and Exhibit 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.) Payback period years 1-b. Assume that Nick's Novelties, Inc. will not purchase new equipment unless it provides a payback period of 4 years or less. Will the company purchase the pinball machines? Yes No 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%).) Simple rate of return % 2-b. If the company requires a simple rate of return of at least 15%, will the pinball machines be purchased? Yes No 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.) Net present value 3-b. Should the company purchase the pinball machines? Yes No
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