Question

Denny Corporation is considering replacing a technologically obsolete machine with a new state-of-the-art numerically controlled machine. The new machine would cost $110,000 and would have a sixteen-year useful life. Unfortunately, the new machine would have no salvage value. The new machine would cost $12,000 per year to operate and maintain, but would save $42,000 per year in labor and other costs. The old machine can be sold now for scrap for $11,000. The simple rate of return on the new machine is closest to (Ignore income taxes.): (Round your answer to 1 decimal place.)

Answer 1

Simple rate of return = Net income/Initial investment

Net income = Savings in labor and other costs – Costs to operate and maintain – Depreciation = $42,000 - $12,000 – ($110000/16) = $42,000 - $12,000 - $6,875 = $23,125

Initial investment = Cost of new machine – Scrap value of old machine = $110,000 - $11,000 = $99,000

Simple rate of return = $23,125/$99,000 = 23.4%