Mercer Corporation is considering replacing a technologically obsolete machine w
ID: 2588677 • 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 $170,000 and would have a sixteen-year useful life. Unfortunately, the new machine would have no salvage value. The new machine would cost $24,000 per year to operate and maintain, but would save $54,000 per year in labor and other costs. The old machine can be sold now for scrap for $17,000. The simple rate of return on the new machine is closest to: (Ignore income taxes in this problem.)
25.33%
31.76%
12.66%
11.40%
Mercer Corporation is considering replacing a technologically obsolete machine with a new state-of-the-art numerically controlled machine. The new machine would cost $170,000 and would have a sixteen-year useful life. Unfortunately, the new machine would have no salvage value. The new machine would cost $24,000 per year to operate and maintain, but would save $54,000 per year in labor and other costs. The old machine can be sold now for scrap for $17,000. The simple rate of return on the new machine is closest to: (Ignore income taxes in this problem.)
Explanation / Answer
Annual net income = 54000-24000-(170000/16)= 19375 Simple rate of return = Annual net income/Initial investment = 19375/170000= 11.40% Option 4 is correct