ABC Steel Co. is considering buying a new machine in order to increase its produ

Question

ABC Steel Co. is considering buying a new machine in order to increase its production capacity using new technology. Details about the new equipment are below:

Purchase Cost                                                                                 $300,000

Savings offered by the new machine                           $62,500 per year

Life of the new machine                                                   15 years

Calculate the simple rate of return of the equipment using the straight-line depreciation method based on the new machine’s useful life.

Explanation / Answer

Annual net income = 62500-(300000/15) = 42500 Simple rate of return = Annual net income/Purchase Cost = 42500/300000= 14.17%

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