Question

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.)

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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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