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 $330,000 and would have a twelve-year useful life. Unfortunately, the new machine would have no salvage value. The new machine would cost $56,000 per year to operate and maintain, but would save $97,000 per year in labor and other costs. The old machine can be sold now for scrap for $33,000. The simple rate of return on the new machine is closest to (Ignore income taxes.): (Round your answer to 1 decimal place.)

Answer 1

The simple rate of return of 4.54%

Step-by-step explanation:

The simple rate of return of 8.75%

($97,000 - $56,000 - $27,500) ÷$297,000

=$13,500÷$297,000

=0.0454×100

=4.54%

The new machine $330,000 ÷ 12 years useful life

=$27,500

The new machine $330,000

Les old machine scrap $33,000

=$297,000

Therefore the simple rate of return is 4.54%