The management of Ro Corporation is investigating automating a process. Old equipment, with a current salvage value of $27,000, would be replaced by a new machine. The new machine would be purchased for $432,000 and would have a 6 year useful life and no salvage value. By automating the process, the company would save $149,000 per year in cash operating costs. The simple rate of return on the investment is closest to (Ignore income taxes.):

19.01%

Explanation:

The simple rate of return is the Income that came from an investment divided by the cost of the investment.

It is therefore expressed by;

Simple rate of return = Net Income / Initial investment

Initial investment

= Price of new machine - salvage value of old machine

= 432,000 - 27,000

= $405,000

Net Income

= Income - depreciation of new machine

= 149,000 - (432,000/6)

= $77,000

Simple rate of return

= 77,000/405,000

= 19.01%

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