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 $200,000 and would have a sixteen-year useful life. Unfortunately, the new machine would have no salvage value. The new machine would cost $30,000 per year to operate and maintain, but would save $62,000 per year in labor and other costs. The old machine can be sold now for scrap for $20,000. The simple rate of return on the new machine is closest to (Ignore income taxes.): (Round your answer to 1 decimal place.) Multiple Choice 0 9.75% 0 31.00% 0 21.67% 0 10.83%

Answer 1

Calculation of Simple rate of return :-
Simple rate of return	=	Annual Net Income
		Net Initial Investment

	Calculation of Annual Net Income:-
a	Annual Saving in labor and other costs	=	$                      62,000
b	Annual Operating and maintaining costs	=	$                      30,000
c	Annual Net Saving (a)	=	$                      32,000
d	Depreciation Expense ($200,000/16 years)	=	$                      12,500
e	Annual Net Income (c-d)	=	$                      19,500
a	Cost of new machine	=	$                    200,000
b	Scrap value of old machine	=	$                      20,000
c	Net Initial Investment (a-b)	=	$                    180,000
			Product A
a	Annual Net Income	=	$                      19,500
b	Net Initial Investment	=	$                    180,000
c	Simple rate of return (a/b) *100	=	10.83%
	Option 10.83% is correct.

Feel free to ask any clarification, if required. Kindly provide feedback by thumbs up, if satisfied. It will be highly appreciated.
Thank you.