Cincinnati Brewing Company has invested in a machine that cost $81,000, that has

Question

Cincinnati Brewing Company has invested in a machine that cost $81,000, that has a useful life of ten years, and that has no salvage value at the end of its useful life. The machine is being depreciated by the straight-line method, based on its useful life. It will have a payback period of six years. Given these data, the simple rate of return on the machine is closest to: (Ignore income taxes in this problem.) (Round your answer to 1 decimal place.)

4.2%

6.7%

3.1%

26.7%

Cincinnati Brewing Company has invested in a machine that cost $81,000, that has a useful life of ten years, and that has no salvage value at the end of its useful life. The machine is being depreciated by the straight-line method, based on its useful life. It will have a payback period of six years. Given these data, the simple rate of return on the machine is closest to: (Ignore income taxes in this problem.) (Round your answer to 1 decimal place.)

Explanation / Answer

Answer: 6.7%

Simple rate of return = Annual Net income / Initial investment = $5400 / $81000 = 6.7%

Payback period = Initial investment / Annual cash inflows

Annual cash inflows = Initial investment / Payback period = $81000 / 6 years = $13500

Annual depreciation = $81000 / 10 years = $8100

Annual net income = Annual cash inflows – Depreciation = $13500 - $8100 = $5400

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