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Sheridon Corporation is investigating automating a process by purchasing a new m

ID: 2381163 • Letter: S

Question

Sheridon Corporation is investigating automating a process by purchasing a new machine for $515,000 that would have a 10 year useful life and no salvage value. By automating the process, the company would save $115,000 per year in cash operating costs. The company's current equipment would be sold for scrap now, yielding $22,000. The annual depreciation on the new machine would be $51,500. (Ignore income taxes.)


Determine the simple rate of return on the investment.


Show work please.  Thanks!

Sheridon Corporation is investigating automating a process by purchasing a new machine for $515,000 that would have a 10 year useful life and no salvage value. By automating the process, the company would save $115,000 per year in cash operating costs. The company's current equipment would be sold for scrap now, yielding $22,000. The annual depreciation on the new machine would be $51,500. (Ignore income taxes.)

Explanation / Answer

[Simple rate of return = (Cost savings ? Depreciation on new equipment) / Initial investment]

Initial investment = 515000-22000 = 493000

Cost savings per year = 115000

Depreciation on new equioment = 51500

Therefore,

Simple rate of return = (115000-51500)/493000

=63500/493000

=0.1288

=12.88%

[Simple rate of return = (Cost savings ? Depreciation on new equipment) / Initial investment]

Initial investment = 515000-22000 = 493000

Cost savings per year = 115000

Depreciation on new equioment = 51500

Therefore,

Simple rate of return = (115000-51500)/493000

=63500/493000

=0.1288

=12.88%

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