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 $170,000 and would have a sixteen-year useful life. Unfortunately, the new machine would have no salvage value. The new machine would cost $24,000 per year to operate and maintain, but would save $54,000 per year in labor and other costs. The old machine can be sold now for scrap for $17,000. The simple rate of return on the new machine is closest to (Ignore income taxes.):

Explanation / Answer

The simple rate of return on the new machine is closest to:

= ($54,000 - $24,000 - $10,625) / ($170,000 - $17,000)

= 12.66%

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