Casinos: Cash flows of operating a single slot machine.

I've been thinking about slot machines lately. They seem to be popping up virtually everywhere, from dog tracks to local tribal land. It seems like anyone who can legally have one buys ten. How is this such a successful business that it is regulated like it is some kind of drug?

Just for fun, I'm going to guesstimate some numbers and try to figure out how this works. We'll say the average machine costs $1000. This might be a bit high, but that's the best I could find from my web research.

I'll make the following assumptions:
- 30 seconds per spin
- $0.50 average wager per spin
- Machine is active 1% of the time
- Machine has a service life of 5 years
- Hit frequency of 97%
- Payout percentage 93%

I'm going to run with a high payout frequency, cause I can imagine it taking a shorter period of time for the machine to reach it's payout percentage (which many states regulate). For example, Nevada law limits payout percentage between 80% and under 100%. I went with 93%, as it seems reasonable to me.

By my calculations, this machine would have 10,519 spins per year, and about $5260 wagered. These numbers are probably very low compared to reality, but we'll go with them anyhow.

If $5260 is wagered, then the profit is 7% of that or $368.20. Keeping it simple, here are the overall cash flows:

0: ($1000.00)
1: $368.20
2: $368.20
3: $368.20
4: $368.20
5: $368.20

IRR: 24.52%