Reference no: EM132607502

Nick's Novelties, Inc. is considering the purchase of electronic pinball machines to place in game arcades. The machines would cost a total of $320,000, 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 $242,000

Operating expenses:

Commissions to game arcades $115,000

Insurance 9,000

Depreciation 37,500

Maintenance 18,000

                  $179,500

Net operating income $62,500

Required:

Question 1-a. Compute the payback period. (Round your answer to 1 decimal place.)

Question 1-b. Assume that Nick's Novelties, Inc. will not purchase new equipment unless it provides a payback period of 4 years of less. Will the company purchase the pinball machines?

Question 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%).)

Question 2-b. If the company requires a simple rate of return of at least 15%, will the pinball machines be purchased? YesNo

Question 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.)

Question 3-b. Should the company purchase the pinball machines?