Question

C Corporation is investigating automating a process by purchasing a machine for $808,200 that would have a 9 year useful life and no salvage value. By automating the process, the company would save $141,000 per year in cash operating costs. The new machine would replace some old equipment that would be sold for scrap now, yielding $22,800. The annual depreciation on the new machine would be $89,800. The simple rate of return on the investment is closest to (Ignore income taxes.): Multiple Choice 11.28% 5.28% 6.52% 16.88%

Answer 1

Answer:

6.52%

Explanation:

According to the scenario, computation of the given data are as follows,

New machine cost = $808,200

Scrap sold = $22,800

Cost of investment = $808,200 - $22,800 = $785,400

Saving from new machine = $141,000

Annual depreciation of machine = $89,800

Net operating income = $141,000 - $89,800 = $51,200

Now we can calculate the rate of return by using following formula,

Simple rate of return = Net operating income ÷ Cost of Investment

= $51,200 ÷ $785,400

= 6.52%