Jark Corporation has invested in a machine that cost $60,000, that has a useful life of six 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 four years. Given these data, the simple rate of return on the machine is closest to (Ignore income taxes.):

Question

Quizplus · Accepted Answer

The annual depreciation expense is $10,000 ($60,000/6 years). The payback period is 4 years, so the annual cash inflow is $15,000 ($60,000/4 years). The annual incremental net operating income is $5,000 ($15,000 - $10,000). The simple rate of return is $5,000/$60,000 = 8.3%.

Jark Corporation Has Invested in a Machine That Cost $60,000