Nick’s Novelties, Inc., is considering the purchase of electronic pinball machines to place in amusementhouses. The machines would cost a total of $300,000, have an eight-year useful life, and have a totalsalvage value of $20,000. The company estimates that annual revenues and expenses associated with themachines would be as follows:Revenues .................................................... $200,000Less operating expenses:Commissions to amusement houses ....... $100,000Insurance ................................................. 7,000Depreciation ............................................. 35,000Maintenance ............................................ 18,000 160,000Net operating income .................................. $ 40,000Required:(Ignore income taxes.)1. Assume that Nick’s Novelties, Inc., will not purchase new equipment unless it provides a paybackperiod of five years or less. Would the company purchase the pinball machines?2. Compute the simple rate of return promised by the pinball machines. If the company requires a simplerate of return of at least 12%, will the pinball machines be purchased?
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 and expenses associated with the
machines would be as follows:
Revenues .................................................... $200,000
Less operating expenses:
Commissions to amusement houses ....... $100,000
Insurance ................................................. 7,000
Depreciation ............................................. 35,000
Maintenance ............................................ 18,000 160,000
Net operating income .................................. $ 40,000
Required:
(Ignore income taxes.)
1. 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?
2. Compute the simple
rate of return of at least 12%, will the pinball machines be purchased?
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