Question

(Ignore income taxes in this problem.) The management of Stanforth Corporation is investigating automating a process. Old equipment, with a current salvage value of $24,000, would be replaced by a new machine. The new machine would be purchased for $516,000 and would have a six-year useful life and no salvage value. By automating the process, the company would save $173,000 per year in cash operating costs. The simple rate of return on the investment is closest to _______ percent

Answer 1

The simple rate of return on the investment is closest to 17.68%

Step-by-step explanation:

Annual incremental cost savings = $ 173,000

Annual depreciation =$
`(516,000)/(6)` = $ 86,000

Annual incremental net operating income = $ 173,000 - $ 86,000

= $ 87,000

Simple rate of return = Annual incremental net operating income ÷ Initial investment = [$ 87,000 ÷ ($516,000 − $24,000)] × 100%

= ($87,000 ÷ $ 492,000) × 100%

= 17.68%