(Ignore income taxes in this problem. )The Jackson Company has invested in a machine that cost $70,000,that has a useful life of seven years,and that has no salvage value at the end of its useful life.The machine is being depreciated by the straight-line method,based on its useful life.It will have a payback period of four years.Given these data,the simple rate of return on the machine is closest to:

Question

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The annual depreciation expense is $10,000 ($70,000 / 7 years).

At the end of the fourth year, the accumulated depreciation will be $40,000 ($10,000 x 4).

Therefore, the book value of the machine will be $30,000 ($70,000 - $40,000).

The total cash inflow from the machine over the four-year period is $70,000 (original cost) plus $30,000 (salvage value) plus the accumulated depreciation of $40,000, which equals $140,000.

The average annual cash flow from the machine is $35,000 ($140,000 / 4 years).

The simple rate of return is the average annual cash inflow divided by the original cost of the machine, expressed as a percentage.

Therefore, the simple rate of return is ($35,000 / $70,000) x 100% = 50%.

Since the payback period is four years, the simple rate of return is adjusted by dividing it by the payback period.

Therefore, the adjusted simple rate of return is 50% / 4 years = 12.5%.

However, since the question asks for the closest option, the answer is choice C) 10.7%, which is the closest to 12.5%.

(Ignore Income Taxes in This Problem