Question

Item1 10 points Time Remaining 59 minutes 50 seconds00:59:50 eBookItem 1 Time Remaining 59 minutes 50 seconds00:59:50 Denny Corporation is considering replacing a technologically obsolete machine with a new state-of-the-art numerically controlled machine. The new machine would cost $150,000 and would have a sixteen-year useful life. Unfortunately, the new machine would have no salvage value. The new machine would cost $20,000 per year to operate and maintain, but would save $50,000 per year in labor and other costs. The old machine can be sold now for scrap for $15,000. The simple rate of return on the new machine is closest to (Ignore income taxes.)

Answer 1

Denny Corporation

The simple rate of return on the new machine is closest to:

= 13.75%.

Step-by-step explanation:

a) Data and Calculations:

Cost of new machine = $150,000

Estimated useful life = 16 years

Salvage Value = $0

Annual depreciation expense = $9,375 ($150,000/16)

Operation and maintenance cost per year = $20,000

Savings in labor and other costs per year = $50,000

The net savings in costs per year = $30,000 ($50,000 - $20,000)

Incremental net income = $20,625 ($30,000 - $9,375)

The simple rate of return = Net Savings per year/Cost of new machine * 100

= $20,625/$150,000 * 100

= 13.75%

b) This simple rate of return of 13.75% does not account for inflation or the time value of the investment. So there is no discounting or calculation of the present values of the investment and the incremental net income. Instead, it considers the annual depreciation expense that is attributable to the investment.