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 $150,000 and would have a sixteen-year useful life. Unfortunately, the new machine would have no salvage value. The new machine would cost $20,000 per year to operate and maintain, but would save $50,000 per year in labor and other costs. The old machine can be sold now for scrap for $15,000. The simple rate of return on the new machine is closest to (Ignore income taxes.):

Answer 1

Answer:

15.28%

Explanation:

Net Profit:

= Saving of Labor & other Costs - Maintenance Cost of Machine -  Depreciation On Machine (150,000 / 16 Year)

= $50,000 - $20,000 - $9,375

= $20,625

Initial Investment:

= Cost of new Machine - Salvage value of old machine

= $150,000 - $15,000

= $135,000

Simple Rate of Return = Net Profit ÷ Initial Investments

                                     = $20,625 ÷ $135,000

                                     = 0.1528 × 100

                                     = 15.28%