Brewer Company is considering purchasing a machine that would cost $740,350 and

Question

Brewer Company is considering purchasing a machine that would cost $740,350 and have a useful life of 12 years. The machine would reduce cash operating costs by $87,100 per year. The machine would have a salvage value of $107,160 at the end of the project. (Ignore income taxes.)

Compute the simple rate of return for the machine. (Round your answer to 2 decimal places. Omit the "%" sign in your response.)

Brewer Company is considering purchasing a machine that would cost $740,350 and have a useful life of 12 years. The machine would reduce cash operating costs by $87,100 per year. The machine would have a salvage value of $107,160 at the end of the project. (Ignore income taxes.)

Explanation / Answer

Hi,

Please find the answer as follows:

Part A:

Annual Cash Inflow = 87100

Payback Period = 740350/87100 = 8.5 years

Part B:

Annual Depreciation = (740350 -107160)/12 = 52765.83 or 52766

Annual Income = 87100 - 52766 = 34334

Simple Rate of Return = 34334/740350*100 = 4.64%

Thanks.

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