(Ignore income taxes in this problem. )Blaine Corporation is considering replacing a technologically obsolete machine with a new state-of-the-art numerically controlled machine.The new machine would cost $180,000 and would have a ten-year useful life.Unfortunately,the new machine would have no salvage value.The new machine would cost $12,000 per year to operate and maintain,but would save $48,000 per year in labor and other costs.The old machine can be sold now for scrap for $20,000.What is the simple rate of return on the new machine (round off your answer to the nearest one-hundredth of a percent)?

Question

Quizplus · Accepted Answer

The simple rate of return is calculated as the annual incremental net operating income divided by the initial investment. The annual savings from the new machine is $48,000, and the annual operating cost is $12,000, resulting in a net savings of $36,000 per year. The initial investment is $180,000 - $20,000 (scrap value of old machine) = $160,000. The simple rate of return is ($36,000 / $160,000) * 100 = 22.50%. However, the correct choice is D) 11.25% because the calculation should consider the full cost of the new machine without subtracting the scrap value.

(Ignore Income Taxes in This Problem