Tu Corporation is investigating automating a process by purchasing a machine for $423,000 that would have a 9 year useful life and no salvage value. By automating the process, the company would save $112,000 per year in cash operating costs. The new machine would replace some old equipment that would be sold for scrap now, yielding $27,000. The annual depreciation on the new machine would be $47,000. The simple rate of return on the investment is closest to:

A. 15.4%
B. 16.4%
C. 26.5%
D. 11.1%

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DeniceSandidge DeniceSandidge · Answer 1 · 2019-12-22T11:18:55+01:00

Answer:

simple rate of return = 16.4 %

so correct option is B. 16.4%

Explanation:

given data

purchasing a machine = $423,000

useful life = 9 years

cash operating costs = $112,000 per year

yielding = $27,000

annual depreciation = $47,000

to find out

simple rate of return on the investment

solution

we get here simple rate of return on the investment that is express as

simple rate of return = [tex]\frac{annual\ incremental\ net\ operating\ income}{initial\ investment}[/tex] .............................1

put here value we get

simple rate of return = [tex]\frac{112000-47000}{423000-27000}[/tex]

solve it we get

simple rate of return = 16.4 %

so correct option is B. 16.4%