25 October, 08:04

# The new machine would cost \$140,000 and would have a fourteen-year useful life. Unfortunately, the new machine would have no salvage value. The new machine would cost \$18,000 per year to operate and maintain, but would save \$48,000 per year in labor and other costs. The old machine can be sold now for scrap for \$14,000. The simple rate of return on the new machine is closest to: (Ignore income taxes in this problem.) 14.29% 34.29% 31.75% 15.87%

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1. 25 October, 08:27
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14.29%

Explanation:

Given:

Cost of the new machine = \$ 140,000

Salvage value = 0

Operation and maintenance cost per year = \$ 18,000

Savings in labor and other costs per year = \$ 48,000

Now,

depreciation per year = Cost of new machine / Total life

or

depreciation per year = \$140,000 / 14 = \$ 10,000

therefore,

the Net income from the new machine per year

= Savings in labor and other costs - Operation and maintenance cost - depreciation

or

= \$ 48,000 - \$ 18,000 - \$ 10,000 = \$ 20,000

Now,

the simple rate of return = (Net income / Initial investment) * 100%

or

the simple rate of return = (\$ 20,000 / \$ 140,000) * 100%

= 14.285% ≈ 14.29%