Question

The new machine would cost $140,000 and would have a fourteen-year useful life. Unfortunately, the new machine would have no salvage value. The new machine would cost $18,000 per year to operate and maintain, but would save $48,000 per year in labor and other costs. The old machine can be sold now for scrap for $14,000. The simple rate of return on the new machine is closest to: (Ignore income taxes in this problem.) 14.29% 34.29% 31.75% 15.87%

Answer 1

14.29%

Step-by-step explanation:

Given:

Cost of the new machine = $ 140,000

Salvage value = 0

Operation and maintenance cost per year = $ 18,000

Savings in labor and other costs per year = $ 48,000

Now,

depreciation per year = Cost of new machine / Total life

or

depreciation per year = $140,000 / 14 = $ 10,000

therefore,

the Net income from the new machine per year

= Savings in labor and other costs - Operation and maintenance cost - depreciation

or

= $ 48,000 - $ 18,000 - $ 10,000 = $ 20,000

Now,

the simple rate of return = ( Net income / Initial investment ) × 100%

or

the simple rate of return = ( $ 20,000 / $ 140,000 ) × 100%

= 14.285% ≈ 14.29%