Question

Denny Corporation is considering replacing a technologically obsolete machine with a new state-of-the-art numerically controlled machine. The new machine would cost $340,000 and would have a ten-year useful life. Unfortunately, the new machine would have no salvage value. The new machine would cost $50,000 per year to operate and maintain, but would save $95,000 per year in labor and other costs. The old machine can be sold now for scrap for $30,000. The simple rate of return on the new machine is closest to (Ignore income taxes.): (Round your answer to 1 decimal place.)

Answer 1

$3.55%

Step-by-step explanation:

The computation of simple rate of return is shown below:-

For computing the simple rate of return first we need to find out the Net annual saving and net investment which is given below:-

Annual depreciation of the machine = $340,000 ÷ 10

= $34,000

Net annual saving = Saving in labor and other cost - Cost to operate and maintain - Annual depreciation of the machine

= $95,000 - $50,000 - $34,000

= $11,000

Net investment = New machine cost - Old machine

= $340,000 - $30,000

= $310,000

Now,

Simple rate of return = Net annual saving ÷ Net investment

= $11,000 ÷ $310,000

= $3.55%