Russnak Corporation is investigating automating a process by purchasing a new machine for $501,000 that would...
Russnak Corporation is investigating automating a process by purchasing a new machine for $501,000 that would have a 6 year useful life and no salvage value. By automating the process, the company would save $125,000 per year in cash operating costs. The company's current equipment would be sold for scrap now, yielding $31,000. The annual depreciation on the new machine would be $83,500. (Ignore income taxes.)
Required:
Determine the simple rate of return on the investment. (Round your answer to 1 decimal place.)
Homework Answers
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| Simple rate of return | = | 8.8% | |
| Workings: | |||
| Computation of Simple rate of return: | |||
| Simple rate of return | = | Net Profit / Investment | |
| = | $41500 / $470000 | ||
| = | 8.8% | ||
| Net Profit | = | Annual Cash Inflows -Annual Depreciation on new machine | |
| = | $125000 - $83500 | ||
| = | $ 41,500 | ||
| Investment | = | Purchase price of new machine - Salvage value of old machine | |
| = | $501000 - $31000 | ||
| = | $ 4,70,000 | ||
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