Ianore income taxes in this problem.) Meyer Corporation is investigating automat

Question

Ianore income taxes in this problem.) Meyer Corporation is investigating automating a process by purchasing a machine for $688,000 that would have an 8 year useful life and no salvage value. By automating the process, the company would save $160,000 per year in cash operating costs. The new machine would replace some old equipment that would be sold for scrap now, yielding $19,000. The annual depreciation on the new machine would be $86,000. The simple rate of return on the investment is closest to: A. 23.3% C. 10.8% D. 12.5% (Ignore income taxes in this problem.) Davenport Corporation has gathered the following data on a proposed investment project Investment required in equipment $150,000 Annual cash inflows Salvage value of equipment Life of the investment $40,000 SO 10 years 10% Required rate of return The company uses straight-line depreciation on all equipment. Assume cash flows occur uniformly throughout a year except for the initial investment The payback period for the investment is: A. 0.27 years B. 3.75 years C. 10.00 years D. 2.13 years

Explanation / Answer

19)

Net cost of machine today = 688000-19000 = 669000

Net savings in operating cost = 160000 - 86000 = 74000

Simple rate of return on investment = (74000/669000) *100 = 11.1%

Answer is B. 11.1%

20)

Payback period = 150000/40000 = 3.75 years

Answer is B. 3.75 years

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