5. Cincinnati Steel and Heat Treating is investigating automating a process. Old

Question

5. Cincinnati Steel and Heat Treating is investigating automating a process. Old equipment, with a current salvage value of $15,000, would be replaced by a new machine. The new machine would be purchased for $408,000 and would have a 6 year useful life and no salvage value. By automating the process, the company would save $141,000 per year in cash operating costs. The simple rate of return on the investment is closest to:

18.6%

17.9%

34.6%

16.7%

5. Cincinnati Steel and Heat Treating is investigating automating a process. Old equipment, with a current salvage value of $15,000, would be replaced by a new machine. The new machine would be purchased for $408,000 and would have a 6 year useful life and no salvage value. By automating the process, the company would save $141,000 per year in cash operating costs. The simple rate of return on the investment is closest to:

Explanation / Answer

Current caash outflow = 408000 - 15000 = 393000

Life of machine = 6 years

Savings per year in cash operating cost = 141000

Outflow = Inflow

393000 = 141000*Present value annuity factor(r,6)

393000/141000 = Present value annuity factor(r,6)

2.7872 = Present value annuity factor(r,6)

We need to find the value of r whose annuity value is 2.7872

Let r be 35% then Present value annuity factor(35%,6) will be 2.3851 which is slightly higher. It means that r will be slightly lower than 35%.

So, Answer is 34.6%

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