Blaine Corporation is considering replacing a technologically obsolete machine w
ID: 2486254 • Letter: B
Question
Blaine Corporation is considering replacing a technologically obsolete machine with a new state-of-the-art numerically controlled machine. The new machine would cost $320,000 and would have a sixteen-year useful life. Unfortunately, the new machine would have no salvage value. The new machine would cost $54,000 per year to operate and maintain, but would save $95,000 per year in labor and other costs. The old machine can be sold now for scrap for $32,000. The simple rate of return on the new machine is closest to: (Ignore income taxes in this problem.)
Explanation / Answer
Initial outflow
Cost of new asset =$3,20,000
Realizable value of old asset=$ 32000
Net out flow = $2,88,000
Net savings p.a =$ 41,000(95000-54000)
Total savings on given project = $656000
Simple rate of return = 656000/288000*100*1/16
=14.23% p.a
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