Denny Corporation is considering replacing a technologically obsolete machine wi

Question

Denny Corporation is considering replacing a technologically obsolete machine with a new state-of-the-art numerically controlled machine. The new machine would cost $600,000 and would have a 10 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 $125,000 per year in labor and other costs. The old machine can be sold now for scrap for $50,000. What percentage is the simple rate of return on the new machine rounded to the nearest tenth of a percent? Ignore income taxes in this problem.

Explanation / Answer

take the units of the nos. as dollars

savings = $125,000

maintenance per year = $20,000

depreciation = 600000/100

net profit = $45,000

therefore investment = (600000+0)/2 = 300000

rate of return = (45000/300000) * 100 =15%

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