The Halsey Corporation is contemplating the purchase of new equipment that would

Question

The Halsey Corporation is contemplating the purchase of new equipment that would require an initial investment of $125,000. The equipment would have a useful life of six years, with a salvage value of $29,000. This new equipment would be depreciated over its useful life by the straight-line method. It would replace existing equipment which is fully depreciated. The existing equipment has a salvage value now of $38,000. The anticipated annual revenues and expenses associated with the new equipment are:

Assume cash flows occur uniformly throughout a year except for the initial investment and the salvage value at the end of the project. For this investment, the simple rate of return to the nearest tenth of a percent is:

43.7%

25.3%

30.4%

17.6%

Explanation / Answer

Revenue:   95,000

Cash expense 41,000+ 16,000 = 57,000

Yearly cash inflow :                       38,000

Initial investment ( Cost - Salvage value of existing machine ) 125,000 - 38,000 =   87,000

Rate of return :   38,000 / 87,000   =   43.7 %

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