Mercer Corporation is considering replacing a technologically obsolete machine w
ID: 2593930 • 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 $240,000 and would have a fifteen-year useful life. Unfortunately, the new machine would have no salvage value. The new machine would cost $38,000 per year to operate and maintain, but would save $77,000 per year in labor and other costs. The old machine can be sold now for scrap for $24,000. The simple rate of return on the new machine is closest to: (Ignore income taxes in this problem.)
A.9.58%
B.32.08%
C.10.65%
D.21.30%
Explanation / Answer
Annual incremental net operating income:
Saving in labor and other costs $77,000
Less: Cost to operate and maintain $38,000
Less: Depreciation $240,000/15 year $16000
Incremental income $23,000
Simple rate of return = Annual incremental net operating income / Initial Investment
= $23,000 / ($240,000 - $24,000) = 10.65%
Option C. 10.65% is correct answer.