Question

Crowl Corporation is investigating automating a process by purchasing a machine for $972,000 that would have a 9 year useful life and no salvage value. By automating the process, the company would save $132,000 per year in cash operating costs. The new machine would replace some old equipment that would be sold for scrap now, yielding $21,000. The annual depreciation on the new machine would be $108,000. The simple rate of return on the investment is closest to (Ignore income taxes.): (Hint: Give answer in decimal format. For example, if an answer is 10%, use the format 0.10 not 10%.)

Answer 1

Answer:

2.5%

Explanation:

Calculation to determine what The simple rate of return on the investment is closest to

First step is to calculate the Annual incremental net operating income

Annual incremental net operating income=$132,000-$108,000

Annual incremental net operating income=$24,000

Second step is to calculate the Initial investment

Initial investment =$972,000-$21,000

Initial investment=$951,000

Now let calculate the Simple rate of return using this formula

Simple rate of return = Annual incremental net operating income ÷ Initial investment

Let plug in the formula

Simple rate of return= $24,000 ÷ $951,000

Simple rate of return=0.025*100

Simple rate of return= 2.5%

Therefore The simple rate of return on the investment is closest to 2.5%