The management of Ro Corporation is investigating automating a process. Old equipment, with a current salvage value of $11,000, would be replaced by a new machine. The new machine would be purchased for $243,000 and would have a 9 year useful life and no salvage value. By automating the process, the company would save $69,000 per year in cash operating costs. The simple rate of return on the investment is closest to (Ignore income taxes.): Multiple Choice a. 18.1% b. 11.1% c. 28.4% d. 17.3%

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20-12-2019
Business

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The management of Ro Corporation is investigating automating a process. Old equipment, with a current salvage value of $11,000, would be replaced by a new machine. The new machine would be purchased for $243,000 and would have a 9 year useful life and no salvage value. By automating the process, the company would save $69,000 per year in cash operating costs. The simple rate of return on the investment is closest to (Ignore income taxes.): Multiple Choice a. 18.1% b. 11.1% c. 28.4% d. 17.3%

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phamdiep1810 phamdiep1810 · Answer 1 · 2019-12-21T06:52:40+01:00

Answer:

The simple rate of return on the investment is closest to a. 18.1%

Explanation:

Assuming that the company uses straight-line depreciation method, Depreciation Expense per year is calculated by following formula:

Depreciation Expense = (Cost of machine − Salvage Value)/Useful Life = ($243,000 - 0)/9 = $27,000

If Ro Corporation uses the new machine, the company would save $69,000 per year in cash operating costs. Net income from the machine per year = $69,000 - $27,000 = $42,000

Total investment on the machine = $243,000 - $11,000 = $232,000

Return on investment (ROI) = Net income/Total investment x 100% = $42,000/$232,000 x 100% = 18.1%