Question

Tipton Corporation is investigating automating a process by purchasing a machine for $805,500 that would have a 9 year useful life and no salvage value. By automating the process, the company would save $139,500 per year in cash operating costs. The new machine would replace some old equipment that would be sold for scrap now, yielding $22,500. The annual depreciation on the new machine would be $89,500. The simple rate of return on the investment is closest to:_________

Answer 1

Answer:

The simple rate of return= 58.65%

Explanation:

Annual Return from the old machine = 22,500/9=2,500

Annual profit  = savings less depreciation=139,500-89,500=50,000

Total annual return = 2500 + 50,000 = 52,500

Average investment = $(805,500+ 0)/9 = 89,500  

Simple average return = average annul return/ Average investment

Average investment = (Initial cost + salvage value)/2

Simple average return = (52,500/ 89,500) × 100 = 53.159

The simple rate of return= 58.65%