A company is considering buying a machine that costs $500,000, has a useful life of ten years, and is depreciated over its useful life by the straight-line method. The salvage value of the machine at the end of ten years will be $40,000. This machine will replace an old machine that is fully depreciated; the old machine has a salvage value of $75,000 now. If the simple rate of return of this investment is 12.7%, then the anticipated annual incremental net operating income from this machine for each of the next ten years is (Ignore income taxes.):

Question

Quizplus · Accepted Answer

The annual depreciation expense is ($500,000 - $40,000) / 10 = $46,000. The initial investment is $500,000 - $75,000 = $425,000. The annual incremental net operating income is calculated as $425,000 * 12.7% + $46,000 = $53,975.

A Company Is Considering Buying a Machine That Costs $500,000