(Ignore income taxes in this problem.) Blaine Corporation is considering replaci

Question

(Ignore income taxes in this problem.) Blaine Corporation is considering replacing a technologically obsolete machine with a new state-of-the-art numerically controlled machine. The new machine would cost $216,000 and would have a ten-year useful life. Unfortunately, the new machine would have no salvage value. The new machine would cost $15,000 per year to operate and maintain, but would save $66,000 per year in labor and other costs. The old machine can be sold now for scrap for $24,000. What is the simple rate of return on the new machine?

15.31%

28.00%

13.61%

32.67%

Explanation / Answer

Initial Investment = Cost of new machine - Cost of old machine

= 216000-24000 i.e 192000

Net Savings in cost = 66000-15000 i.e 51000

Depreciation = 216000-0/10 i.e 21600

Accounting profit = 51000-21600 i.e 29400

Simple rate of return = 29400/192000 i.e 15.31%

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