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 $426,000 and would have a 6 year useful life and no salvage value. By automating the process, the company would save $147,000 per year in cash operating costs. The simple rate of return on the investment is closest to

Answer 1

Simple rate of return on the investment is 18%

Step-by-step explanation:

Initial investment = Cost of the new machine - Salvage value of old machine

=$426,000 - $24,000 = $402,000

Annual cost savings = $147,000

Annual depreciation = $426,000 / 6 = 71,000

Annual incremental net operating income = $147,000 - $71,000 = $76,000

Simple rate of return on the investment = $71,000 / $402,000

=0.18

=18%