The Diamond Jubilee is a floating riverboat casino that operates on the Mississippi River. The casino is open 24 hours daily and offers a "full house" of gaming, including numerous slot and video poker machines and a variety of table games such as blackjack, Caribbean stud, craps, and roulette. On average, the Diamond Jubilee earns $0.10 in contribution margin for every $1.00 wagered. The remaining $0.90 goes to the gamblers as winnings and to cover the casino's variable costs.

Lucy "Lucky" Johnson is in charge of the Diamond Jubilee's slot machines, which includes both mechanical and video machines. Based on Lucy's recommendation, casino management recently replaced, at a total cost of $1,250,000, their 250 video poker machines. The 250 machines just acquired are expected to last two years. At the end of their two-year life, the machines would have zero salvage value-their sale price would be exactly offset by the cost of dismantling the machines, packing, and shipping.

Unfortunately, days after the new machines arrived, Lucy learned from her industry contact of an even better video poker machine. Compared to the machines recently purchased, these machines have sound that is more vivid, more stunning visual effects, and other attention grabbers. Moreover, Lucy believes that the total wagered in one video poker machine would increase by $30,000 a year if the casino had purchased 250 of these machines rather than the 250 machines actually purchased.

The better video poker machines, however, cost $5,500 each. Similar to the machines recently purchased, these machines also last for two years and have zero salvage value at the end of their two-year life. In addition, the operating costs of the better machine and those recently purchased are identical. Finally, like new cars, once they are driven off the lot, video poker machines depreciate substantially after they are put in use. For the Diamond Jubilee, this means that each recently acquired video poker machine would only net $1,000 if it were sold today.

Required:

a. By how much will the Diamond Jubilee's profit increase or decrease over the next two years if it purchases the new video poker machines and sells the recently acquired video poker machines? Ignore tax effects and the time value of money in your analysis.

b. A key part of Lucy's job is to keep track of trends in the gaming industry and the new products coming into the market. Suppose that only Lucy knows about the better video poker machines. The Diamond Jubilee's other managers would learn of the better machine's availability only in a year or so. Would Lucy recommend replacing the recently purchased video poker machines with the better machines?

c. Would your answer to requirements (a) and (b) change if the Diamond Jubilee had paid $2,500, rather than $5,000, for each of the recently acquired video poker machines?