Reference no: EM132715701
Nick's Novelties, Inc. is considering the purchase of electronic pinball machines to place in game arcades. 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 estimated that annual revenues and expenses associated with the machines would be as follows:
Revenues $200,000
Operating expenses:
Commissions to game arcades $100,000
Insurance 7,000
Depreciation 35,000
Maintenance 18,000
160,000
Net operating income $ 40,000
Required:
Problem 1. Assume that Nick's Novelties, Inc. will not purchase new equipment unless it provides a payback period of five years of less. Will the company purchase the pinball machines?
Problem 2. 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?
Problem 3. If Nick's Novelties, Inc. has a discount rate of 18%, what is the NPV of this investment? (Hint: Identify the relevant costs and then perform an NPV analysis.) Should the company purchase the pinball machines?