The management of Schenk Corporation is investigating automating a process by replacing old equipment by a new machine. The old equipment would be sold for scrap now for $13,000. The new machine would cost $648,000, would have a 9 year useful life, and would have no salvage value. By automating the process, the company would save $186,000 per year in cash operating costs. (Ignore income taxes.)Required:Determine the simple rate of return on the investment to the nearest tenth of a percent.
What will be an ideal response?
| Annual incremental cost savings | $ | 186,000 |
| Annual depreciation ($648,000 - $0)/9 | 72,000 | |
| Annual incremental net operating income | $ | 114,000 |
Simple rate of return = Annual incremental net operating income ÷ Initial investment
= $114,000 ÷ ($648,000 - $13,000)
= $114,000 ÷ $635,000 = 18.0%
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