Mercer Corporation is considering replacing a technologically obsolete machine w
ID: 2492914 • Letter: M
Question
Mercer Corporation is considering replacing a technologically obsolete machine with a new state-of-the-art numerically controlled machine. The new machine would cost $250,000 and would have a ten-year useful life. Unfortunately, the new machine would have no salvage value. The new machine would cost $12,000 per year to operate and maintain, but would save $55,000 per year in labor and other costs. The old machine can be sold now for scrap for $10,000. The simple rate of return on the new machine is closest to:
Explanation / Answer
Simple Rate of Return = Net Profit / Intial Investments Net Profit Saving of Labor & other Costs 55,000 Less: Maint. Cost of Mach (12,000) Less: Dep. On Machine (250000 / 10 Year) (25,000) Net Profit 18,000 Intial Investment = $250000 (Cost of new Machine) - 10000 (Salavge value of old machine) Intial Investment = $240,000 Simple Rate of Return = 18000 / 240000 = 7.50%