Nick’s Novelties, Inc. is considering the purchase of electronic pinball machines to place in game arcades. The machines would cost a total of $400,000, have an eight-year useful life, and have a total salvage value of $20,000. The company estimated that annual revenues and expenses associated with the machines would be as follows:
Revenues $ 282,000 Operating expenses: Commissions to game arcades $ 175,000 Insurance 9,000 Depreciation 47,500 Maintenance 18,000 249,500 Net operating income $ 32,500 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.)
1-b. Assume that Nick’s 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 12%, will the pinball machines be purchased?
No
Yes
3-a. If Nick’s Novelties, Inc. has a discount rate of 19%, 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 No
Yes