Ignore income taxes in this problem.) Mercer Corporation is considering replacin
ID: 2438243 • Letter: I
Question
Ignore income taxes in this problem.) Mercer Corporation is considering replacing a technologically obsolete machine with a new state-of-the-art numerically controlled machine. The new machine would cost $130,000 and would have a ten-year useful life. Unfortunately, the new machine would have no salvage value. The new machine would cost $16.000 per year to operate and maintain, but would save $46,000 per year in labor and other costs The old machine can be sold now for scrap for $13.000. The simple rate of return on the new machine is closest to Assume the company uses straight-line depreclation.) ? 14.53% 2906% 35.38% 13.08% O Type here to search t 49 8 2 3 4 6Explanation / Answer
Correct answer is= 14.53%
Basis Details:
Cost of new machine = $ 130,000
Useful life= 10 years
Depreciation per year = Cost of new machine/ Useful life= $ 130,000/ 10 years= $13,000
Incremental Operating cost per year = $ 16,000
Cost Savings per year= $ 46,000
Salvage value of old machine = $ 13,000
Initial Investment = Cost of new machine- Salvage value of old machine
=$ 130,000- $ 13,000 = $ 117,000
Simple Rate of Return = { Cost Savings per year- (Incremental Operating cost per year+
Depreciation per year)} / Initial Investment * 100
= { 46000 - (16000+13000)} / (130000- 13000)* 100
= 17000/ 117000 *100
= 14.53%