Jark Corporation has invested in a machine that cost $76,000, that has a useful life of eight 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 five years. Given these data, the simple rate of return on the machine is closest to (Ignore income taxes.): (Round your answer to 1 decimal place.)
A) 3.9%
B) 5.0%
C) 7.5%
D) 32.5%

Question

Quizplus · Accepted Answer

The simple rate of return is calculated by dividing the annual incremental net operating income by the initial investment. With a straight-line depreciation, the annual depreciation expense is $76,000 / 8 years = $9,500. To achieve a payback in 5 years without considering salvage value, the machine must generate $76,000 / 5 years = $15,200 annually. The net operating income is this amount minus the depreciation, so $15,200 - $9,500 = $5,700. The simple rate of return is then $5,700 / $76,000 = 0.075, or 7.5%.

Jark Corporation Has Invested in a Machine That Cost $76,000