C Corporation is investigating automating a process by purchasing a machine for $799,200 that would have a 9 year useful life and no salvage value. By automating the process, the company would save $136,000 per year in cash operating costs. The new machine would replace some old equipment that would be sold for scrap now, yielding $21,800. The annual depreciation on the new machine would be $88,800. The simple rate of return on the investment is closest to (Ignore income taxes.):________A. 11.11%
B. 16.71%
C. 5.11%
D. 5.75%

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adnansoomro2019 adnansoomro2019 · Answer 1 · 2020-07-06T02:41:34+02:00

Answer:

The simple rate of return is 6.07% and is closest to option D

Explanation:

Here we will use simple rate of return formula for calculation

Formula: Simple rate of return = Incremental operating income/Initial investment

Firstly we need to find incremental operating income and initial

investment to move further on simple rate of return formula

Incremental operating income = 136,600 - 88,800 = 47,200

(Here we deducted depreciation from our saving)

Initial Investment = 799,200-21800 = 777,400

Simple rate of return = 47,200/777,200

Simple rate of return = 0.0607 x 100

Simple rate of return = 6.07%