Question

C Corporation is investigating automating a process by purchasing a machine for $792,900 that would have a 9 year useful life and no salvage value. By automating the process, the company would save $132,500 per year in cash operating costs. The new machine would replace some old equipment that would be sold for scrap now, yielding $21,100. The annual depreciation on the new machine would be $88,100. The simple rate of return on the investment is closest to (Ignore income taxes.):

Answer 1

The simple rate of return= 53.2%

Step-by-step explanation:

Annual Return from the old machine 132,500 - 88,100= 44,400

Annual return from the sale of the old machine =21,100/9=2433.333333

Total annual return - 2433.33 + 44,400 =46833.33

Average investment = $(792,900 + 0)/9 = 88100

Simple average return = average annul return/ Average investment

Average investment = (Initial cost + salvage value)/2

Simple average return = (46,833.33/ 88,100) × 100 = 53.159

The simple rate of return= 53.2%