Crowl Corporation is investigating automating a process by purchasing a machine for $802,800 that would have a 9 year useful life and no salvage value. By automating the process, the company would save $138,000 per year in cash operating costs. The new machine would replace some old equipment that would be sold for scrap now, yielding $22,200. The annual depreciation on the new machine would be $89,200. The simple rate of return on the investment is closest to (Ignore income taxes.):

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andromache andromache · Answer 1 · 2020-05-08T10:18:10+02:00

Answer:

Simple rate of return = 6.25%

Explanation:

As per the data given in the question,

Net operating income = saving - depreciation on machine

Investment = cost price - scrap value

So, we can calculate the simple rate of return by using following formula:

Simple rate of return = Net operating income ÷ investment

By putting the value, we get

= ($138,000 - $89,200) ÷ ($802,800 - $22,200)

= 0.0625

= 6.25%