(Ignore income taxes in this problem. )The management of Rouleau Corporation is investigating automating a process.Old equipment,with a current salvage value of $10,000,would be replaced by a new machine.The new machine would be purchased for $240,000 and would have a 6 year useful life and no salvage value.By automating the process,the company would save $64,000 per year in cash operating costs.The simple rate of return on the investment is closest to:

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 is $64,000, and the initial investment is $240,000. Therefore, the simple rate of return is ($64,000 / $240,000) = 0.2667 or 26.67%. However, considering the salvage value of the old equipment, the net investment is $230,000 ($240,000 - $10,000), leading to a rate of ($64,000 / $230,000) = 0.2783 or 27.83%, which is closest to 10.4% when considering the options provided.

(Ignore Income Taxes in This Problem