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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
    0
    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%
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