Question

Crowl Corporation is investigating automating a process by purchasing a machine for $809,100 that would have a 9 year useful life and no salvage value. By automating the process, the company would save $141,500 per year in cash operating costs. The new machine would replace some old equipment that would be sold for scrap now, yielding $22,900. The annual depreciation on the new machine would be $89,900. The simple rate of return on the investment is closest to (Ignore income taxes.) __________.

Answer 1

Answer:

6.5%

Explanation:

Initial investment= $809100-$22900

= $786200

Annual incremental net operating income= $141500-$89900

=$51600

Therefore, the formular for simple rate of return is:

Annual incremental net operating income/ Initial investment

= $51600/$786200

= 0.065×100

= 6.5%

Thus, the simple rate of return on the investment is closest to 6.5%