Russnak Corporation is investigating automating a process by purchasing a new machine for $198,000 that would have a 9 year useful life and no salvage value. By automating the process, the company would save $68,000 per year in cash operating costs. The company's current equipment would be sold for scrap now, yielding $18,000. The annual depreciation on the new machine would be $22,000. (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 | $ | 68,000 |
| Annual depreciation ($198,000 - $0)/9 | 22,000 | |
| Annual incremental net operating income | $ | 46,000 |
Simple rate of return = Annual incremental net operating income ÷ Initial investment
= $46,000 ÷ ($198,000 - $18,000)
= $46,000 ÷ $180,000 = 25.6%
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