Blaine Corporation is considering replacing a technologically obsolete machine w

Question

Blaine Corporation is considering replacing a technologically obsolete machine with a new state-of-the-art numerically controlled machine. The new machine would cost $240,000 and would have a fifteen-year useful life. Unfortunately, the new machine would have no salvage value. The new machine would cost $38,000 per year to operate and maintain, but would save $77,000 per year in labor and other costs. The old machine can be sold now for scrap for $24,000. The simple rate of return on the new machine is closest to: (Ignore income taxes in this problem.)

A. 9.58%

B. 32.08%

C. 21.30%

D. 10.65%

Explanation / Answer

Investment Initial cost 240000 Less scrap value of old machine 24000 Net investment 216000 Incremental revenue Saving per year 77000 Less : cost of operating new machine 38000 Less : depriciation (240000 /15) 16000 Incremental revenue 23000 Simple rate of return 10.65% hence option D is correct

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