$$\text { Reference: } 10 - 11$$ Purvell Company has just acquired a new machine. Data on the machine follow: $$\begin{array} { | l | l | }
\hline \text { Purchase cost } & \$ 50,000 \
\hline \text { Annual cost savings } & \$ 15,000 \
\hline \text { Life of the machine } & 8 \text { years } \
\hline
\end{array}$$ The company uses straight-line depreciation and a $5,000 salvage value. (The company considers salvage value in making depreciation deductions.) Assume cash flows occur uniformly throughout a year.
-The simple rate of return would be closest to?
A)17.5%.
B)30.0%.
C)18.75%.
D)12.5%.

Question

$$\text { Reference: } 10 - 11$$ Purvell Company has just acquired a new machine. Data on the machine follow: $$\begin{array} { | l | l | } 
\hline \text { Purchase cost } & \$ 50,000 \
\hline \text { Annual cost savings } & \$ 15,000 \
\hline \text { Life of the machine } & 8 \text { years } \
\hline
\end{array}$$ The company uses straight-line depreciation and a $5,000 salvage value. (The company considers salvage value in making depreciation deductions.) Assume cash flows occur uniformly throughout a year.
-The simple rate of return would be closest to?
A)17.5%.
B)30.0%.
C)18.75%.
D)12.5%.

Quizplus · Accepted Answer

The simple rate of return is calculated by dividing the annual incremental net operating income by the initial investment. The annual depreciation is calculated as (Purchase cost - Salvage value) / Life of the machine = ($50,000 - $5,000) / 8 = $5,625. The annual incremental net operating income is the annual cost savings minus the annual depreciation = $15,000 - $5,625 = $9,375. The initial investment is the purchase cost = $50,000. Thus, the simple rate of return = ($9,375 / $50,000) * 100% = 18.75%.

Reference: 10−11\text { Reference: } 10 - 11 Reference: 10−11 Purvell Company Has Just Acquired a New Machine

$\text { Reference: } 10 - 11$ Purvell Company Has Just Acquired a New Machine