(Ignore income taxes in this problem.) The management of Stanforth Corporation i

Question

(Ignore income taxes in this problem.) The management of Stanforth Corporation is investigating automating a process. Old equipment, with a current salvage value of $30,000, would be replaced by a new machine. The new machine would be purchased for $438,000 and would have a 6 year useful life and no salvage value. By automating the process, the company would save $151,000 per year in cash operating costs. The simple rate of return on the investment is closest to:

19.1%

17.8%

34.5%

16.7%

(Ignore income taxes in this problem.) The management of Stanforth Corporation is investigating automating a process. Old equipment, with a current salvage value of $30,000, would be replaced by a new machine. The new machine would be purchased for $438,000 and would have a 6 year useful life and no salvage value. By automating the process, the company would save $151,000 per year in cash operating costs. The simple rate of return on the investment is closest to:

Explanation / Answer

correct option is "A" - 19.10%

Initial investment = 438000 - 30000 = $ 408,000

Annual profit = 151000 - 73000 = $ 78,000

Simple rate of return = 78000 / 408000

                             = 19.1%

**Depreciation = 438000/6 = 73000

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