Question

The management of Ro 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 $384,000 and would have a 6 year useful life and no salvage value. By automating the process, the company would save $133,000 per year in cash operating costs. The simple rate of return on the investment is closest to (Ignore income taxes.): (Round your answer to 1 decimal place.)

Answer 1

Answer:

The simple rate of return on the investment is closest to 19.16%

Explanation:

In order to calculate the the simple rate of return on the investment we would have to use the following formula:

simple rate of return = Annual incremental net operating income

                                                  Initial investment

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

Initial investment  = $384,000 - $24,000 = $360,000

Annual cost savings = $133,000

Annual depreciation = $384,000/6 = $64,000

Therefore, Annual incremental net operating income = $133,000 - $64,000  = $69,000

Therefore, simple rate of return = $69,000  / $360,000 = 19.16%

The simple rate of return on the investment is closest to 19.16%