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The management of Ro Corporation is investigating automating a process
The management of Ro Corporation is investigating automating a process. Old equipment, with a current salvage value of $12,000, would be replaced by a new machine. The new machine would be purchased for $360,000 and 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 simple rate of return on the investment is closest to (Ignore income taxes.):
Multiple Choice
- 18.7%
- 18.1%
- 34.7%
- 16.7%
Expert Solution
Computation of Simple Rate of Return on the Investment:
Simple Rate of Return = Annual Net Income / Initial Investment
Here,
Annual Depreciation = ($360,000 - $12,000) / 6 = $58,000
Annual Net Income = Cash Savings - Depreciation = $125,000 - $58,000 = $67,000
Initial Investment = $360,000
Simple Rate of Return = $67,000 / $360,000 = 18.61%
Simple Rate of Return on the Investment is 18.61% or 18.7% So, the correct option is 1st "18.7%".
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