Sheridon Corporation is investigating automating a process by purchasing a new m
ID: 2381163 • Letter: S
Question
Sheridon Corporation is investigating automating a process by purchasing a new machine for $515,000 that would have a 10 year useful life and no salvage value. By automating the process, the company would save $115,000 per year in cash operating costs. The company's current equipment would be sold for scrap now, yielding $22,000. The annual depreciation on the new machine would be $51,500. (Ignore income taxes.)
Determine the simple rate of return on the investment.
Show work please. Thanks!
Sheridon Corporation is investigating automating a process by purchasing a new machine for $515,000 that would have a 10 year useful life and no salvage value. By automating the process, the company would save $115,000 per year in cash operating costs. The company's current equipment would be sold for scrap now, yielding $22,000. The annual depreciation on the new machine would be $51,500. (Ignore income taxes.)
Explanation / Answer
[Simple rate of return = (Cost savings ? Depreciation on new equipment) / Initial investment]
Initial investment = 515000-22000 = 493000
Cost savings per year = 115000
Depreciation on new equioment = 51500
Therefore,
Simple rate of return = (115000-51500)/493000
=63500/493000
=0.1288
=12.88%
[Simple rate of return = (Cost savings ? Depreciation on new equipment) / Initial investment]
Initial investment = 515000-22000 = 493000
Cost savings per year = 115000
Depreciation on new equioment = 51500
Therefore,
Simple rate of return = (115000-51500)/493000
=63500/493000
=0.1288
=12.88%
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