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(Ignore income taxes in this problem.) Messersmith Corporation is investigating automatinga process by purchasing a machine for $688,000 that would have an 8 year useful life andno salvage value. By automating the process, the company would save $160,000 per yearin cash operating costs. The new machine would replace some old equipment that wouldbe sold for scrap now, yielding $19,000. The annual depreciation on the new machinewould 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%

Respuesta :

Answer:

B. 11.1%

Explanation:

The computation of simple rate of return on the investment is shown below:-

For computing the simple rate of return on the investment first we need to find out the annual incremental net operating and initial investment which is here below:-

Annual incremental net operating = Annual cost saving - Annual depreciation

= $160,000 - $86,000

= $74,000

Initial investment = Purchase price of machine - Sale value of old machine

= $688,000 - $19,000

= $669,000

Simple rate of return = Annual incremental net operating ÷ Initial investment

= $74,000 ÷ $669,000

= 11.1%

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