Crowl Corporation is investigating automating a process by purchasing a machine

Question

Crowl Corporation is investigating automating a process by purchasing a machine for $797,400 that would have a 9 year useful life and no salvage value. By automating the process, the company would save $135,000 per year in cash operating costs. The new machine would replace some old equipment that would be sold for scrap now, yielding $21,600. The annual depreciation on the new machine would be $88,600. The simple rate of return on the investment is closest to (Ignore income taxes.): Multiple Choice 11.16% 16.76% 5.98% 516%

Explanation / Answer

Calculate simple rate of return :

Simple rate of return = Net income*100/initial investment

Net income = (135000-88600) = 46400

Initial investment = (797400-21600) = 775800

Simple rate of return = 46400*100/775800 = 5.98%

so answer is c) 5.98%

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