The management of Ro Corporation is investigating automating a process. Old equipment, with a current salvage value of $11,000, would be replaced by a new machine. The new machine would be purchased for $243,000 and would have a 9 year useful life and no salvage value. By automating the process, the company would save $69,000 per year in cash operating costs. The simple rate of return on the investment is closest to (Ignore income taxes.):

Question

Quizplus · Accepted Answer

The simple rate of return is calculated as the annual savings minus the depreciation, divided by the initial investment. Depreciation is $243,000 / 9 = $27,000 per year. Annual savings are $69,000. Thus, the simple rate of return is ($69,000 - $27,000) / $243,000 = 17.28%, which is closest to 18.1%.

The Management of Ro Corporation Is Investigating Automating a Process