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Nick's Novelties, Inc. is considering the purchase of electronic pinball machines to place in game arcades. The machines would cost a total of $596,000, 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 $596,000, have an eight-year useful life, and have a total salvage value of $40,000. The company estimated that annual revenues and expenses associated with the machines would be as follows: $319,000 Revenues Operating expenses: Commissions to game arcades Insurance Depreciation Maintenance Net operating income $135,000 9,000 69,500 18,000 231,500 $ 87,500 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? O Yes O No 2-a. Compute the simple rate of return promised by the pinball machines. (Round your answer to 1 decimal place. (l.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 14%, will the pinball machines be purchased? 0 Yes O No
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