Question

Tu Corporation is investigating automating a process by purchasing a machine for $423,000 that would have a 9 year useful life and no salvage value. By automating the process, the company would save $112,000 per year in cash operating costs. The new machine would replace some old equipment that would be sold for scrap now, yielding $27,000. The annual depreciation on the new machine would be $47,000. The simple rate of return on the investment is closest to:
A. 15.4%
B. 16.4%
C. 26.5%
D. 11.1%

Answer 1

Answer:

simple rate of return = 16.4 %

so correct option is B. 16.4%

Explanation:

given data

purchasing a machine = $423,000

useful life =  9 years

cash operating costs = $112,000 per year

yielding = $27,000

annual depreciation = $47,000

to find out

simple rate of return on the investment

solution

we get here simple rate of return on the investment that is express as

simple rate of return = $\frac{annual\ incremental\ net\ operating\ income}{initial\ investment}$    .............................1

put here value we get

simple rate of return = $\frac{112000-47000}{423000-27000}$

solve it we get

simple rate of return = 16.4 %

so correct option is B. 16.4%