Problem 2 Nick's Novelties, Inc., is considering the purchase of electronic pinball machines to place in amusement houses. The machines would cost a total of $300,000, have an eight- year useful life, and have a total salvage value of $20,000. The company estimates that annual revenues from this machine will be $200,000 and annual cash expenses wll be $125,000. a) How much in annual depreciation for these machines? Hint: (Original Cost minus Salvage value divided by useful life) b) How much is net income from these machines? c) How much is net cash inflow from these machines? (Hint: Ignore depreciation) d) Assume that Nick's Novelties, Inc., will not purchase new equipment unless it provides a payback period of five years or less. Would the company purchase the pinball machines? Show work. e) Compute the simple rate of return promised by the pinball machines. If the company requires a simple rate of return of at least 12%, will the pinball machines be purchased? Show work. f) Why are Payback and Simple Rate of Return not the best measures for decision making? Page 3