Hinck Corporation is investigating automating a process by purchasing a new mach

Question

Hinck Corporation is investigating automating a process by purchasing a new machine for $512,000 that would have a 10 year useful life and no salvage value. By automating the process, the company would save $130,000 per year in cash operating costs. The company's current equipment would be sold for scrap now, yielding $19,000. The annual depreciation on the new machine would be $51,200. (lgnore income taxes.) Required: Determine the simple rate of return on the investment to the nearest tenth of a percent. (Round your answer to 1 decimal place.) Simple rate of return 16.01%

Explanation / Answer

Answer:-Simple rate of return = (Cost savings – Depreciation)/Initial Investment

           =($130000 - $51200)/ $493000

           =$78800/493000

          =16%

Where:-

Initial investment = Cost of new machine – Scrap value of equipment

                             = $512000 - $19000

                             = $493000

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