Messersmith Corporation is investigating automating a process by purchasing a machine for $688,000 that would have an 8 year useful life and no salvage value. By automating the process, the company would save $160,000 per year in cash operating costs. The new machine would replace some old equipment that would be sold for scrap now, yielding $19,000. The annual depreciation on the new machine would be $86,000. The simple rate of return on the investment is closest to:
A)23.3%
B)11.1%
C)10.8%
D)12.5%

Question

Quizplus · Accepted Answer

The simple rate of return is calculated as the annual incremental net operating income divided by the initial investment. The annual savings in cash operating costs is $160,000, and the annual depreciation is $86,000, so the annual incremental net operating income is $160,000 - $86,000 = $74,000. The initial investment is $688,000 - $19,000 = $669,000. The simple rate of return is $74,000 / $669,000 = 11.1%.

Messersmith Corporation Is Investigating Automating a Process by Purchasing a Machine