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29 January, 14:45

The management of Ro Corporation is investigating automating a process. Old equipment, with a current salvage value of $24,000, would be replaced by a new machine. The new machine would be purchased for $468,000 and would have a 6 year useful life and no salvage value. By automating the process, the company would save $161,000 per year in cash operating costs. The simple rate of return on the investment is closest to (Ignore income taxes.) :

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  1. 29 January, 14:57
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    36.26%

    Explanation:

    Simple rate of return:

    return/investment

    return:

    In this case, it will be the cost saving for the new machine: 161,000

    investment

    We will decrease the investment by the recovery from the old machine.

    468,000 new machine - 24,000 salvage value of new = 444,000

    Then, proceed to calculate:

    161,000/444,000 = 0.3612 = 36.26%

    Consideration:

    Is important to state that this rate, do not consider the time value of money, neither the cash flow of the project.
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