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Homework answers / question archive / Nick's Novelties, Inc
Nick's Novelties, Inc. is considering the purchase of electronic pinball machines to place in game arcades. The machines would cost a total of $500,000, have an eight-year useful life, and have a total salvage value of $30,000. The company estimated that annual revenues and expenses associated with the machines would be as follows:
Revenues $230, OM Operating expenses: CommIssions to game arcades .$110,,: 0,01(3, Insurance Depreciation 58, 750 Maintenance 18, 000 194, 750 Net operating income $ 41, 250
1-a. Compute the payback period. (Round your answer to 1 decimal place.)
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%).)
?3-a. If Nick's Novelties, Inc. has a discount rate of 17%, 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.)
1) Computation of Payback Period:
Payback period = Initial Investment / Annual cash inflow from operation
Here,
Initial Investment = $500,000
Annual Net Cash Inflow from Operation = Net Income + Depreciation
= $41,250 + $58,750
=$100,000
Payback Period = $500,000 / $100,000 = 5 years
2) Computation of Simple Rate of Return:
Simple Rate of Return = Net Operating Income/Initial Investment
= $41,250/$500,000
= 8.25%
3) Computation of Net Present Value:
| Computation of NPV of the Investment: | ||||
| Year | Cash (Outflows) | PV Factor @17% | Present Value of | |
| Inflows | Cash Flows | |||
| Initial Investment | 0 | -500000 | 1 | -500000 |
| Annual Cash Inflows | 1-8 years | 100000 | 4.207163 | 420716 |
| Salvage Value | 8th year | 30000 | 0.284782 | 8543 |
| Net Present Value | -70740 | |||
