Question

Crowl Corporation is investigating automating a process by purchasing a machine for $804,600 that would have a 9 year useful life and no salvage value. By automating the process, the company would save $139,000 per year in cash operating costs. The new machine would replace some old equipment that would be sold for scrap now, yielding $22,400. The annual depreciation on the new machine would be $89,400. The simple rate of return on the investment is closest to (Ignore income taxes.): (Round your answer to 1 decimal place.)

Answer 1

Simple rate of return on Investment = 6.34%

Step-by-step explanation:

As per the data given in the question,

Initial investment = $804,600

Realisable value = $22,400

Net cash flow = $804,600 - $22,400

= $782,200

Annual income:

Net income = Cash savings - Depreciation

= $139,000 - $89,400

= $49,600

Simple rate of return on Investment = Net income ÷ Net cash flow

= $49,600 ÷ $782,200

= 0.0634

= 6.34%