Question

The management of Ro Corporation is investigating automating a process. Old equipment, with a current salvage value of $18,000, would be replaced by a new machine. The new machine would be purchased for $414,000 and would have a 6 year useful life and no salvage value. By automating the process, the company would save $143,000 per year in cash operating costs. The simple rate of return on the investment is closest to (Ignore income taxes.): (Round your answer to 1 decimal place.)

Answer 1

Answer:

Multiple choices are:

18.5%

16.7%

34.6%

15.9%

The correct option is the last one,15.9%

Explanation:

The simple rate of return is the annual incremental net savings divided by the initial investment.

The annual incremental net savings is the annual savings recorded from the new process minus annual depreciation charge.

annual savings is $143,000

depreciation charge=cost of new equipment-salvage value of old equipment/useful life of the new equipment

depreciation charge=($414,000-$18,000)/6=$66,000

simple rate of return=$66,000/$414,000=15.9%