Question

C Corporation is investigating automating a process by purchasing a machine for $810,000 that would have a 9 year useful life and no salvage value. By automating the process, the company would save $142,000 per year in cash operating costs. The new machine would replace some old equipment that would be sold for scrap now, yielding $23,000. The annual depreciation on the new machine would be $90,000. The simple rate of return on the investment is closest to (Ignore income taxes.):

Answer 1

6.61%

Step-by-step explanation:

Given that,

Cash savings of the company = $142,000;

Depreciation on the new machine = $90,000

Net Income = Cash savings of the company - Depreciation on the new machine

= $142,000 - $90,000

= $52,000

Old machine that is sold for scrap with a value = $23,000

New equipment purchased = $810,000;

Net Cash Flows in Year 0:

= New equipment purchased - Value of Old machine that is sold for scrap

= $810,000 - $23,000

= $787,000

Simple rate of return on Investment:

= Net Income ÷ Net Cash flows on Investment

= $52,000 ÷ $787,000

= 6.60736

= 6.61%