The management of Ro Corporation is investigating automating a process. Old equipment, with a current salvage value of $12,000, would be replaced by a new machine. The new machine would be purchased for $360,000 and would have a 6 year useful life and no salvage value. By automating the process, the company would save $125,000 per year in cash operating costs. The simple rate of return on the investment is closest to (Ignore income taxes.): (Round your answer to 1 decimal place.)
A) 18.7%
B) 18.1%
C) 34.7%
D) 16.7%

Question

Quizplus · Accepted Answer

The simple rate of return is calculated as the annual savings minus the depreciation expense, divided by the initial investment. The annual savings are $125,000, and the depreciation expense is $360,000 / 6 = $60,000. The initial investment is $360,000 - $12,000 = $348,000. The simple rate of return is (($125,000 - $60,000) / $348,000) * 100 = 18.7%.

The Management of Ro Corporation Is Investigating Automating a Process