Denny Corporation is considering replacing a technologically obsolete machine with a new state-of-the-art numerically controlled machine. The new machine would cost $100,000 and would have a sixteen-year useful life. Unfortunately, the new machine would have no salvage value. The new machine would cost $10,000 per year to operate and maintain, but would save $40,000 per year in labor and other costs. The old machine can be sold now for scrap for $10,000. The simple rate of return on the new machine is closest to (Ignore income taxes.) : (Round your answer to 1 decimal place.)

Question

Business

Jacob Oneill

20 June, 06:04

Denny Corporation is considering replacing a technologically obsolete machine with a new state-of-the-art numerically controlled machine. The new machine would cost $100,000 and would have a sixteen-year useful life. Unfortunately, the new machine would have no salvage value. The new machine would cost $10,000 per year to operate and maintain, but would save $40,000 per year in labor and other costs. The old machine can be sold now for scrap for $10,000. The simple rate of return on the new machine is closest to (Ignore income taxes.) : (Round your answer to 1 decimal place.)

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Answers (1)

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Kaylynn · Answer 1

26.4%.

Explanation:

Net Profit:

= Saving of Labor & other Costs - Maintenance Cost of Machine - Depreciation On Machine (100,000 / 16 years)

= $40,000 - $10,000 - $6,250

= $23,750

Initial Investment:

= Cost of new Machine - Salvage value of old machine

= $100,000 - $10,000

= $90,000

Simple Rate of Return = Net Profit : Initial Investments

= $23,750 : $90,000

= 0.264 * 100

= 26.4%