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 $250,000 and would have a sixteen-year useful life. Unfortunately, the new machine would have no salvage value. The new machine would cost $40,000 per year to operate and maintain, but would save $79,000 per year in labor and other costs. The old machine can be sold now for scrap for $25,000. 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 is 10.38%

Step-by-step explanation:

In order to calculate the simple rate of return we would have to use the following formula:

simple rate of return=Net operating income/Net investment cost

Net investment cost=$250,000-$25,000

Net investment cost=$225,000

Annual depreciation=$250,000/16=$15,625

Therefore, Net operating income=$79,000-$40,000-$15,625

Net operating income=$23,375

Therefore, simple rate of return=$23,375/$225,000

simple rate of return=10.38%