Nicks Novelties, Inc. is considering the purchase of electronic pinball machines to place in game arcades. The machines would cost a total of $500,000, have an eight-year useful life, and have a total salvage value of $30,000. The company estimated that annual revenues and expenses associated with the machines would be as follows:

Revenues				$	236,000
Operating expenses:
Commissions to game arcades	$	110,000
Insurance		8,000
Depreciation		58,750
Maintenance		18,000			194,750
Net operating income				$	41,250

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.)

1-b. Assume that Nicks Novelties, Inc. will not purchase new equipment unless it provides a payback period of 6 years or less. Will the company purchase the pinball machines?

multiple choice 1

• 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%).)

2-b. If the company requires a simple rate of return of at least 14%, will the pinball machines be purchased?

multiple choice 2

• No

• Yes

3-a. If Nicks Novelties, Inc. has a discount rate of 17%, 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?

multiple choice 3

• No

• Yes