Denny Corporation is considering replacing a technologically obsolete machine with a new state-of-the-art numerically controlled machine. The new machine would cost $450,000 and would have a ten-year useful life. Unfortunately, the new machine would have no salvage value. The new machine would cost $20,000 per year to operate and maintain, but would save $100,000 per year in labor and other costs. The old machine can be sold now for scrap for $50,000. The simple rate of return on the new machine is closest to (Ignore income taxes.):

Question

Quizplus · Accepted Answer

The simple rate of return is calculated by dividing the annual net cash flow by the initial investment. The annual net cash flow is the difference between the annual savings and the annual operating and maintenance costs. The initial investment is the cost of the new machine minus the salvage value of the old machine.In this case, the annual net cash flow is $100,000 - $20,000 = $80,000. The initial investment is $450,000 - $50,000 = $400,000. Therefore, the simple rate of return is $80,000 / $400,000 = 20.00%.

Denny Corporation Is Considering Replacing a Technologically Obsolete Machine with a New