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:

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?

• Yes

• No

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

• 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?

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